Krugman vs. Hazlitt on Minimum Wage: Who Is Really ‘Wrong About Everything’?

In his blog last week, Paul Krugman lambasted Austrian economist Henry Hazlitt, writing that “Hazlitt has been wrong about everything for more than 80 years” and acting bewildered that Hazlitt is nevertheless “still regarded as a guru.” His explanation for this is, “Bad ideas, it appears, are extremely robust in the face of contrary evidence.”

This is remarkable hypocrisy, and seemingly a classic case of psychological projection, given how Krugman advocated the very bad idea to have the Federal Reserve inflate in order to lower interest rates in order to create a housing bubble to replace the burst dot-com bubble.

Krugman’s arrogance in light of his own record is truly astounding. His case that Hazlitt was “wrong about everything” is that Hazlitt argued during the Great Depression against fixing the price of wages above a certain minimum. Krugman trumpets John Maynard Keynes arguing that where there are a lot of unemployed workers because businesses would be running at a loss to hire them at the minimum wage, a reduction of wages is not the answer, that “it is a delusion” to “suppose” otherwise. Krugman quotes Keynes arguing that “if wages are cut all round, the purchasing power of the community as a whole is reduced by the same amount as the reduction of costs; and, again, no one is further forward.”

The problem is Krugman either doesn’t understand, or pretends not to understand, that this is absolute nonsense.

First of all, it’s a strawman argument, because Hazlitt didn’t call for wage cuts “all around”. Hazlitt simply was not arguing for across-the-board cutsin workers’ wages. So quoting Keynes here is totally irrelevant to Hazlitt’s argument. One must presume that, had Krugman ever actually read Hazlitt, he must know this.

Second, it is nonsense to argue that allowing the market to determine wages would not help to lower unemployment during a depression. As Hunter Lewis writes in Where Keynes Went Wrong, “Since wages are just one of many prices, this meant that unemployment is caused by an imbalance of prices. Since the primary function of markets is to bring prices into balance, it makes no sense to say that markets cannot correct unemployment.”

As Hazlitt himself explained in his book Economics in One Lesson, there are “harmful results of arbitrary governmental efforts to raise the price of favored commodities. The same sort of harmful results follows efforts to raise wages through minimum wage laws. This ought not to be surprising; for a wage is, in fact, a price.”

Hazlitt further observed that the first effect “when a law is passed that no one shall be paid less than $30 for a forty-hour week is that no one who is not worth $30 a week to an employer will be employed at all. You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation.”

Or here’s how Murray N. Rothbard eloquently reiterated the same logic: “In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment, period. The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result….

“The advocates of the minimum wage and its periodic boosting reply that all this is scare talk and that minimum wage rates do not and never have caused any unemployment. The proper riposte is to raise them one better; all right, if the minimum wage is such a wonderful anti-poverty measure, and can have no unemployment-raising effects, why are you such pikers? Why you are helping the working poor by such piddling amounts? Why stop at $4.55 an hour? Why not $10 an hour? $100? $1,000?

“It is obvious that the minimum wage advocates do not pursue their own logic, because if they push it to such heights, virtually the entire labor force will be disemployed. In short, you can have as much unemployment as you want, simply by pushing the legally minimum wage high enough.”

In his book, Lewis observes that Hazlitt himself noted that Keynes did not challenge the logic of his argument against minimum wage laws “head-on by any coherent and clear-cut argument.” It is difficult to deny, Hazlitt wrote, “what has become in the last two centuries the most strongly established principle in economics—to wit, that if the price of any commodity or service is kept too high (i.e., above the point of equilibrium) some of that commodity or service will remain unsold. This is true of eggs, cheese, cotton, Cadillacs, or labor. When wage-rates are too high there will be unemployoment. Reducing the myriad wage-rates to their respective equilibrium points may not in itself be a sufficient step to the restoration of full employment (for there are other possible disequilibriums to be considered), but it is an absolutely necessary step. This is the elementary and inescapable truth that Keynes, with an incredible display of sophistry, irrelevance, and complicated obfuscation, tries to refute.”

Similarly, neither does Krugman by any coherent and clear-cut argument refute the logic by which Hazlitt concluded that eliminating minimum wage laws would have benefited workers by allowing them to gain employment during the Great Depression. He simply declares Hazlitt “wrong about everything”, cites an irrelevant quote from Keynes, and then goes on to cite Irving Fisher to bolster his assertion that following Hazlitt’s advice would have made things “worse” and the “overall effect” would have been “to deepen the depression.” He reiterates his argument that “making it easier for wages to fall, as Hazlitt demanded then and his modern acolytes demand now, doesn’t just redistribute income away from workers to the wealthy (funny how that happens); it actually worsens the economy as a whole.”

That Krugman can make this argument with a straight face is remarkable. Krugman constantly calls for more inflation, which doesn’t just redistribute income away from workers to the wealthy by robbing them of the purchasing power of their wages (funny how that happens), but actually worsens the economy, like by creating housing or other asset bubbles that precipitate financial crises when they eventually burst, as they must.

Krugman has even explicitly argued the “case for a higher inflation rate” on the grounds that “it’s really, really hard to cut nominal wages”, so in lieu of “wage cuts”, just have “higher inflation”, which “would lead to lower unemployment”.

Krugman constantly contradicts himself, but seems totally oblivious to the implications. So it is that he can argue that Hazlitt was “totally wrong” to argue that eliminating minimum wage laws would reduce unemployment and yet at the same time it is true that reducing workers’ real wages through inflation would reduce unemployment. It’s a case of Krugman offering a heads I win, tails you lose argument.

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Absolutely! But I would like to ask a question regarding the statement that this is an example of a “Heads I win, tails you lose” argument; when has Krugman ever, in the face of adversity, offer anything more or less? The fact that this man is taken seriously has got to be an act of God, because I see no reason why anyone, given his track record, would listen to him.

ajtdc

Krugman is to the economy what Obama is to the Constitution.

Gary

Actually, Krugman is to Economics what Dr. Seuss is to Medicine.

dalibertarian

Your’s is wrong actually. Krugman is an economist that has poor knowledge of economics. Obama is a constitutional lawyer who doesn’t understand (has poor knowledge of) the constitution. Dr. Seuss doesn’t have a medical degree and no knowledge of medicine. Sorry I had to point this out.

dalibertarian

I’ve got another one but not to Krugman directly:

Mainstream economists are to economics what Young Earth Creationists would be to geology if their theory was mainstream geology.

How is it again that Krugman is a Nobel Prize (I know its actually the Bank of Sweden Prize) winner?

MohamedS

I really would love to know !! …. Ooohhh I know, because he plays the game. He says what politicians want to hear … and Paamm, We give you a nobel prize

Tyler Seamons

Krugman is a hack.

David

As far as minimum wage laws are concerned, if it is beyond the mind of Krugman to understand the logic that raising the price of labor (or anything, such as a product)—whether it be by voluntary market forces (e.g., the law of supply and demand) or by forced government edicts (e.g., minimum wage laws)—will eventually cause buyers to drop out of the market for labor (i.e., unemployment will increase), then how Krugman can be considered a rational person, let alone a professional economist, is beyond me.

libertarian

He’s a “macroeconomist.” This means he gets to ignore the fact that there is another entire sub-discipline in economics called microeconomics. Since your argument is based on microeconomics he gets to bring in his fallacious macroeconomic theory. He says “Well to assume that your theory makes sense at the macro level is the fallacy of composition. You have to consider the government reported aggregates in order to get the real picture of what is happening in the economy.” This quote isn’t actually his but it was my macroeconomics teacher in college who happens to be an acolyte of this pathetic excuse for an economist. The problem is people don’t realize that the economy is atomistic and is nothing more than the sum of every actor’s actions so the fallacy of composition that they peddle so often doesn’t really even apply here. I think that argument from my teacher is how Keynesians trap people into their pseudoscientific ideology of government intervention. If only they could realize that all macroeconomic theory derives from microeconomic theory and that their aggregates are fallacious measures of the economy (isn’t it interesting how they pick and choose what jumps their fake gap: they even use the law of supply and demand to link their aggregate demand and supply to price inflation).

But to really answer the question: Why don’t they start engaging in rational science and why do people follow them? Well because they are not interested in science but rather progressive ideology in the name of science. I suspect the reason they are so popular is that they are politicians at heart not because people have truly rationalized it, they promise what people want with no way to give it to them.

Joel

I agree with a lot of this, but I don’t see the argument that since raising the minimum wage to $100/hr is a bad idea, that raising it to a “living wage” is. I don’t think that holds up because a person making $100/hr would not put all of the money back into the economy. In Krugman’s head, if you find that point, you have winner. Any rate that you give to a person up to a point will just go directly to buying more stuff. If they make enough to start saving, then you are back to same issue with the top earners holding on to tons of cash, not circulating it.
It should also be noted that instead of McDonald’s paying their employees, we do, because most people on welfare do work.
Thanks for the article, Mr Hammond.

“I don’t see the argument that since raising the minimum wage to $100/hr is a bad idea, that raising it to a “living wage” is.”

It’s the same logic, Joel. It is just intuitive that if the minimum wage was raised to $100/hr that the consequence would be massive unemployment. The logic is no different for what you call a “living wage”, which is an arbitrary concept. The consequence of making it illegal to hire people below a certain wage that they would otherwise want to work for is to price them right out of a job.
I don’t really see what point you are driving at about how a worker chooses to spend his wages, whether he is making $10/hr or $100. I don’t know what you have in mind with this comment how if people are able to save, it just means top earns get to hold onto the cash.

economist

It is inanely obvious that NMW is detrimental and is a scam just like VAT(what the…!), Capital gains tax (joke) and Income tax. They are responsible for most of the poverty about today….paired with the expansion of the money supply. Everyone either knows it or hasn’t applied their mind to it. Apologies for calling a dog a dog.

dalibertarian

I pretty much agree, but would argue that the expansion of credit is actually more detrimental to society than direct taxation. Direct taxation takes away purchasing power of our total income not purchasing power of units of our income.

Affecting the value of dollars through expansion of the monetary base and credit will always have more detrimental results because they interfere with private actors being able to make sound investment decisions by hiding real long term interest rates. They just see the nominal short term ones imposed by the central bank. Simply expropriating dollars through taxation and having the state spend them as they see fit does destroy wealth but it does not distort the market to the point that the most basic price signals for private investment become useless for making long term decisions.

libertarian

It’s a form of argument called reductio ad absurdum which is latin for reduction to the absurd. It is to show that an argument’s conclusion is false because accepting its logic leads to obviously false conclusions. The Keynesian roughly asserts “Raising the minimum wage will help workers” but we know that no one wants to raise it to $100/hr because we all agree that will cause massive unemployment. The inference in the argument “Raising the minimum wage will help workers” does not change though depending on the amount we raise the minimum wage. So we know that the argument’s conclusion is false.

Since there is a roughly proportional effect in raising a price above the market clearing price and the level of shortage it creates, and a large rise in wage correlates to a large rise in unemployment. That means that when the price level rises at a slighter level we still get more unemployment, but the rate just increases slightly.

The problem with you free market cheer leaders is that you have lost all sense of humanity. You talk about the balance between labour and capital in a way that clearly indicates your utter contempt for morality and ethics. Sure you fantasy land of economics could work just fine if humans had no emotional or spiritual needs, that most people had no problem being a slave to the profit desires of the uber capitalists but your big problem is that your “science” is nothing like science and more akin to fantasy….Your omission of some very key factors in determining your predictions based on your scientific models either shows you to be an utter fool or a sociopath concerned only on the profit margins of filthy rich pigs. I pity the soul of a free market cheerleader…they are either to stupid to know or to mentally sick to care.

libertarian

How have we lost a sense of humanity for trying to be rational? You act like we have a contempt for ethics but the problem is that we do not think it is ethical to tell other people what to do with their property. Workers have the right to negotiate their wages with employers. It happens all the time in jobs with market wages prevailing above the minimum wage. People get paid more because they have labor that is worth more to the employer (read: they have a better product to sell).

Progressives who argue for government intervention and ideas like positive rights are the ones engaging in fantasy. But of course you’ll just say that ethics is “doing the thing that brings the most good to the most people” in your usual utilitarian nonsense. Once you realize that the ends DO NOT justify the means and that only an ethical theory where actions are justified on their own merit will you be able to understand us.

But forget ethics, it isn’t part of science it is part of philosophy. We are talking about economics which is science. I’m sure you are not familiar with the idea of consumer sovereignty but I will explain it. Since the entrepreneurs and capitalists are ultimately producing any product or service for consumers, they are at the knees of the consumers. If your business does not produce a product people want, it goes bankrupt. This is not evil, it is how people figure out what society wants by market signals. The entrepreneurs/capitalists cannot just lower the wage of workers to some substandard level just like they cannot raise the prices of their product to some ridiculous one. If they were to do so then by the law of demand all the consumers would drop out of the market and the business would go bankrupt. So stop thinking businesses are out there to full the poor little common man into working for cheap labor. They are out there to give the poor little common man what he wants and if they do not then the owners become poor little common men themselves.

I pity the soul of the progressive government intervention cheerleader. They don’t take time to learn science. They don’t love wisdom like the philosophers they claim to be. Rather they perpetually spew nonsense like the politicians that they have learned to follow and believe that there is enough of everything for whatever people want. They constantly ignore the reality of scarcity to live in the fantasyland of freely fulfilled needs. But I don’t know if they do it because they are too dumb to notice they are wrong, they like lying, or what the reason is. I would prefer not to attack the intelligence of a man because of the ideas he espouses. After all even a fool can tell the truth and a wise man can lie.

BTW I’m not a filthy rich pig, I’m a middle class young adult who is currently pursuing a college degree and plans to contribute value to society (which is a subjective thing of course). Maybe some day I’ll be very wealthy or maybe some day I’ll be poor as dirt but I’ll sure as hell never think the minimum wage will help me either way.

rodfitts

Critics of Capitalism and of its corollary, the free market, typically paint us as heartless servants of the rich. But Hammond’s article points out that the minimum wage law literally guarantees unemployment. Getting rid of minimum wage laws would allow workers and businesses a chance to keep jobs they both would otherwise lose. He also notes that the overall cause of unemployment, the working poor, and the financial crises of the past and present was (and still is) inflation of the money supply.

Outlawing jobs and reducing the purchasing power of everyone’s dollars are the essential effects of minimum wage laws and of inflation. Stopping those policies are two effective means of dealing with the economic problems of this country, and many others. And it would actually show that we do have humanity and actually care about the problems facing the poor and the unemployed.

Capitalism is the moral socio-economic system. It is a system that will benefit everyone, *if* it is allowed to function, if people are allowed to make their own economic decisions. The commenter should question the morality and intentions of those who would cheapen the value of our hard-earned money, and legally bar us from employment we might have had, otherwise.

You are just invoking Krugman. See 5th to last paragraph of the article, where I address this nonsense. Again, how does expressing the desire to see unemployment reduced illustrate a loss of “all sense of humanity”?

As for the rest, you have no idea what you are even talking about. You are spouting meaningless nonsense. Take the “balance” you speak of, and let’s think about what you are really saying. The “balance” being referred to is the equilibrium price between supply and demand. So you are saying that the law of supply and demand is a “fantasy” that exists only in an imaginary world where humans have no emotional or spiritual needs.

Well, first of all, that prices tend towards an “equilibrium” in a free market, where sellers of a good are able to meet all the demand consumers have for that good without either running out of stock before every buyer who wants it gets it or having unsold stock on his shelves that nobody wants to buy, is not a “fantasy”. It’s an empirical reality. You can observe it. This is why it is referred to as a “law”. Like gravity. It happens.

Second of all, this reality obviously doesn’t occur absent human needs. On the contrary, human needs drives this whole process. After all, humans engage in trade in order to satisfy their needs. What having a free market means is that humans can engage in voluntary trade for mutual benefit, in which both parties are able to satisfy their need for something, with each one valuing the thing the other person has more than the thing in their own possession. Thus, they trade, and in so doing satisfy their human needs, which certainly may include emotional and spiritual needs.

And yes, the voluntary exchange also includes exchange of labor for wages.

When you boil down your comment, Pauli C., there is nothing to it except ad hominem argumentation and utter nonsense.

dalibertarian

“You don’t get it do you stupid man. The omniscient state in its infinite wisdom knows the needs of each citizen better than any market. This talk of markets being effective is ludicrous. Maybe markets can be slightly effective once we have government intervention. But the real fix is to just destroy markets all together and let the glorious omnipotent state decide everything for us. Only then we will get our needs provided on an ethical basis”
– What I imagine Pauli C. responding with

These people are extremely close minded. He has pretty much already rejected what is known to all serious economists as rational economics to peddle his fantasy of progressive politics saving the day. No amount of rational engagement can convince such people, I’ve come to realize, because they will always retort your remarks with their original argument. They have blinded themselves in irrationality to the point where they can’t see they are clearly wrong. It’s sad that so many people are like this, but as long as people are more driven by this pandering emotional appeal than our clearly rational logical appeals their numbers will continue to grow. Thankfully history shows that societies that adopt these principles fail much earlier than they probably otherwise would (unfortunately all of us who see the light have to bear the consequences of more foolish men).

John Campanella

Yes you guys, but this is the result of 12 years of government propaganda. Get ’em while they’re young. We have to make this argument as much we can in order to wake people up to this reality.

dalibertarian

Only 12 years? More like since the birth of the state. But I do agree, it is very difficult to get people to change even their most ridiculous beliefs when they find those beliefs to be comfortable.

John Campanella

Well, I meant 12 years as in, individually. 1st – 12th grade. But then again, individually we are raised by people who were also raised this way and living these delusions their whole lives. It’s a wonder we have the amount of free thinkers our movement has at all.

dalibertarian

Ahh I get you. I don’t think the schooling was horrible. I mean it would be way better if the free market handled it. The economics and civics classes could go away though.

Flaminroids

Very well said. Most free market supporters have no idea of the human costs. In fact, I doubt they would care as long as they can buy t-shirts at Walmart for $5 and $1 cheeseburgers at McDonalds.

Flaminroids, please see my reply to Pauli C.’s nonsense. As for your own, consider the fact that you are effectively here condemning the act of individuals engaging in voluntary exchange for mutual benefit, which establishes prices for goods through supply and demand, which sends signals to investors and entrepreneurs how to most efficiently direct scarce resources towards productive ends, which results in an increase in the standard of living for all of society. You seem to have no idea that you just typed that comment on a product made available to you at an affordable price by the same free market you condemn.

dalibertarian

Your last sentence demonstrates the problem with anti-market sentiments better than any of the scientific, philosophical, or otherwise theoretical arguments we make. This was the same thing we saw with the occupy wall street people – they were using iPhones and wearing clothing provided by corporations. Then they condemned the “greedy” corporations for hating people on video recording equipment sold to them by the “greedy” corporations. I understand the sentiments against crony capitalism, it is just welfare provided to the rich rather than the poor and harms the markets in the same way and is unethical in precisely the same way.

These ultra-left wing progressives do not have a serious ethical basis for their critiques though. They are utilitarian crusaders, who think an institutionalized modern-day robin hood (one of the many grotesque functions of the state) would better serve justice than voluntary exchange. But to them theft is only theft if it “hurts” the people you steal from. They think the wealthy are so rich that forcibly taking their money to help the “greater good” will benefit society without hurting the wealthy.

It goes back to Bastiat’s seen and unseen consequences though. The seen is that the rich don’t physically suffer and the poor may physically benefit for a short amount of time but the unseen is that much of the money expropriated from the wealthy ends up lost in overhead costs (which for bureaucracies is like 50 cents off the dollar or more) and prevents innovation from investment. Then the unseen detriments hurt everyone in the long run when money is moved away from investment spending which is innovative to consumption spending which can only drive current production (unless of course the profit made from consumption is saved to build inventory but then the government just expropriates it again anyways and redistributes it for consumption or picks winners by investing in their favorite companies, *cough*bailouts MIC FinSec*cough*.

They also ignore that any solid moral framework (whether it is deontological, divine command theory, virtue ethics, etc.) does not support the notion that ends justify means (utilitarianism/consequentialism), but rather means must be justified in and of themselves.

The saddest thing is when people support perpetual inflation which directly hurts hurts them more than tax increases. Anything for cheap credit though when your a progressive though since you probably won’t have an income to pay back your debt later.

(Note by progressive I mean anyone who wants more government control over anything – economic or social. This includes both mainstream US political parties which have their most vocal supporters coming from the just north of authoritarian neoconservative camp).

Andy Curzon

v.good post dalibertarian imho!

Andy Curzon

This comments shows a lack of understanding of costs. It is in fact the other way to this: because measuring human costs is an abstract and inaccurate process it is precisely what interventionists cling to in order to discredit the free market.

Although I believe them near enough impossible to calculate (note H.H.Hoppe’s ‘Problems with Economic Calculation’) one can logically infer that human costs could only be lower because of more economic freedom. I can not guess by how much but they these human costs would have been lower not for intervention (or the NMW specifically here) – because it is a foregone event – (i.e.: we can not mae up the results), but how could logic lead us to argue that allowing people to make their own decisions with their own property could even possibly lead to an increase in ‘human costs’?

It all seems circular and vague, on this I suggest Benjamin R. Tuckers’ ‘Individual Freedom’ written in a time when liberty was more widely understood and agreed with (1880s) to some extent.

disqus_UuishN3ZfL

There is no such thing a Utopia Jr. Socialism does not work. Unions are very corrupt and have been know to act in criminal ways as they did with me. Regardless of what you may think you won’t get what you expect. if you kill off Free Enterprise you kill freedom.

disqus_UuishN3ZfL

I used to think that I was never qualified to be able to run for Political Office let alone run that office, that I was just not smart enough or qualified. But Jesus H Christ, when I see the morons who are being appointed to office and then being Elected to office I am beginning to think I am over qualified to hold office. Common sense is dead.

dalibertarian

Holding public office has destroyed the aspirations of many defenders of freedom. As Rothbard put it, the state will do whatever it can to justify its continued existence and to justify its command over more aspects of society. Lord Acton said, “Power tends to corrupt, and absolute power corrupts absolutely.” Playing with politics is the ultimate way for a person to gamble with their own principles. The corrupting influence of power and our innate desire for power are what make the state corrupt almost all of those who become a cog in it.

So yes you are probably just as qualified to hold office as many of our current representatives, but you have to ask yourself if it is really worth it for your sanity.

P.S. I’m not trying to fear monger. Some people like Ron Paul are able to try to fix the problem from inside without corrupting their ideals or compromising on their principles. The fact is that the majority of people cannot stand up to the pressure of power when presented with the opportunity to have it. If you have Netflix, I suggest you watch the series House of Cards. It shows very well how politics represents the desire for power over the desire for justice.

PaulI C

When Money is real and not imaginarily invented by a private bank then the exchange between some persons life and another persons money will be a lot fairer..Right now you give equal ethical measure to labour and capital (dehumanising humans instantly) when capital is something concentrated into the hands of a few and created by them at their leisure.. You talk about equilibrium in an environment of complete control and domination by capital…..It reeks of myopic wilful ignorance, stinks of a sociopathic dehumanised world view and sounds like the words of a nice comfortable white western Elitist….tell me how you can even discuss equilibrium when money is created our of thin air and is based on debt to that private bank that created it……….Or maybe you genius economists have no idea how our monetary system operates….

We are talking about a free market where money is not created by the government. You actually have no idea how our monetary system operates if you think money is created by a private bank. Money creation starts with the Federal Reserve System which is part of the United States government. Maybe you have been reading too many conspiracy theories about how the Rothschild’s “own” our central bank or our commercial banks?

The Federal Reserve System is made up of a board of governors (which the chairman is a member of) appointed by the President of the United States, an agency called the Federal Open Market Committee, 12 regional Federal Reserve Banks, and the privately owned banks that are members of the system. The only thing selected privately in the public part of the system are the presidents of the regional banks. The Regional banks implement the policies created by the FOMC and are responsible for regulating member banks. Commercial Banks can have demand deposit (checking) accounts at their regional Fed.Res.Bank. Foreign governments and the US governments have accounts at the banks as well. Private citizens cannot have accounts at the Reserve Banks.

When the FOMC implements inflationary policies they expand the monetary base which is the strictest measure of money consisting only of deposits at the Reserve Banks and the physical currency (paper money/metallic coins) in the economy. They can do this for example by crediting an account at a regional Reserve Bank when buying an asset. When they buy government debt (treasuries) this is called Quantitative Easing. Then through the process of fractional reserve lending, commercial banks expand credit on top of the increase in the monetary base. That is where money is creating privately, when banks only keep a small ratio of deposits as assets and loan out the rest. Since other banks do the same thing, eventually you have a bunch of demand deposit accounts everywhere that are redeemable for their full balance but the banks do not have the notes to back them in their assets. We have Federal Deposit Insurance to insure the deposits in these accounts. That means that if a bank run were to occur, any checking account is insured up to a certain limit. The Federal Government must coin the money to back people withdrawing their deposits. If this were ever to occur you could see how the monetary base (because physical currency is included) could be increased by the amount insured. This would lead by the process of fractional reserve lending to exponential growth in the money supply.

If you were instead to have money created in the free market, whatever is a good medium of exchange (gold the most likely) would be used as money. If we adopted Rothbard’s idea then we would require deposit banks (banks that only take deposits) to keep 100% reserves and charge a small fee for storing money and issuing notes. This is how a checking account should work, you should lose a slight amount of money on it. Loan banks on the other hand would not be allowed to issue notes and would face the same threat of bankruptcy as other businesses were they to become insolvent. This would prevent money from being created out of “thin air.” It is a libertarian idea because the 100% reserve ratio requires that deposit banks do not issue notes redeemable for money (gold in our example) that they can not fulfill withdrawals for.

Yes we know how our current monetary system works and it is not ran in the private sector. It is a joint effort between the public and private sector but the private sector decisions are influenced to near certainty by the regulations imposed by the public sector. It is just another example of government regulation of an industry allowing it to become corrupt. In addition, we know a lot about the economy. I’m not even an economist but I have a large amount of knowledge concerning the economy (no where near expert of course). Were you to stop watching conspiracy theory videos (which is the only way you could get the idea that the Fed is private) and read serious economic works you would learn something also.

So lets summarize:
1) You are wrong.
2) The genius (Austrian) economists are right.
3) The people here are not economists but are educated.

jmillsintacoma

Jeremy –

Good stuff, but: Where, in Hazlett’s classical analysis have we accounted for how business profits are shared?

Because prices for all things (including labor) are a function of supply and demand, not marginal utility, most workers (including those employed at minimum wage) are generating profits exceeding their wages. A forced increase in labor costs, whether due to a rise in minimum wage, or, say, successful union organizing, simply divides the business revenue differently; workers getting more and owners getting less.

This means that if the minimum wage goes up, McDonalds might not fire a single worker, but might instead respond with a decrease in its dividend, continuing it’s business as usual despite increased labor costs. That behavior would certainly be expected of any business where return on invested capital is high.

Henry Ford said: “If it is right for the manager of a business to try to make it pay larger dividends, it is quite as right that he should try to make it pay higher wages.” When Henry Ford doubled minimum wages at his factory, it flourished.. That some businesses have this revelation forced upon them, rather than recognizing it on their own doesn’t seem to change the insight Ford had.”

It seems to me you are simply wrong to premise your argument on the assumption that establishing a minimum wage “simply divides the business revenue differently”. This just seems to me another way of denying that wages are a price determined by supply and demand and that fixing the price of wages above where they would otherwise be simply prices workers whose productivity is lower and not worth the higher wage right out of a job.

jmillsintacoma

Hmmm. “Simply wrong” isn’t a compelling argument.

We can agree that wages are determined by supply and demand. But it does not happen with the neatness that the classical model posits. Equilibrium is a target, a goal never reached. Prices of all things are, at all times, in a state of flux. The free market is a process of discovery. And, it is not impossible that business could discover higher wages improve business. That’s what Ford guessed at, but only discovered to be true after trying it. Before he did that, he had just miscalculated the proper wage to pay to maximize his profits.

So, even using the classical model, if wages are – due to miscalculation by business owners – below the equilibrium intersection, then a forced increase in wage rates doesn’t lead to unemployment; it actually leads to additional employment at higher wage rates, pushing the market toward the elusive “equilibrium” point.

Only by assuming the market has arrived already at “equilibrium” can one show via the classical model that further wage increases lead to rising unemployment.

Moreover, the entire supply “curve” laid out in the classical model – the upward tilted line – implies that if more is paid, additional labor comes to market. John Maynard Keynes (who said a lot of crap) did correctly observe that this might not happen in practice. If wages go up, workers may prefer additional leisure, and so a worker who gets a raise might thereafter decline overtime as it’s not needed to maintain the worker’s standard of living. That observation has fuzzy implications for minimum wage laws, but at the least it suggests the classical model might be flawed, and its “curves” inaccurate.

Seems to me that, at best, one could plausibly maintain that politicians are probably less capable of setting wage rates that maximize employment than is business (which has an interest in productively employing everyone) left alone to work in concert with workers. The fact that business and workers probably know best, however, is a long, long way from the mathematically rigorous assertions made in this writing.

We can debate whether the adjective “compelling” applies, but it is nevertheless a *valid* argument to simply point out that the premise of your own is false.

You’re trying to further that same argument with the same false premise, on the basis of this hypothetical: “if wages are – due to miscalculation by business owners – below the equilibrium intersection…” But there is no such “if”. This fundamentally contradicts your statement “We can agree that wages are determined by supply and demand”, as it is an ipso facto denial that wages, in this situation, would be determined by supply demand.

You need to make up your mind whether or not you believe wages are, in a free market, determined by supply and demand. You can’t have it both ways.

dalibertarian

His analysis of the model is actually 100% accurate. Why he assumes that markets are constantly not near the clearing price beats me. Both empirical and Austrian (deductive) analysis show that they move towards it and once near it stay near it unless sudden intervention or natural disaster causes a change.

He basically agrees with Hazlitt’s contentions. He just thinks Hazlitt was being pompous. He is trying to find rigor in a book that was written at a popular level.

jmillsintacoma

Correct. But, the “sudden intervention” is often a new technology, or a competitor who introduces a new product. For example, Ford’ introduction of the Mustang would have affected wages both at Ford and at Chevy. The plain fact is that in a competitive – free market – economy, one expects wages to be in a constant state of flux, virtually always above or below an “equilibrium” clearing price, which, by the way, is itself constantly shifting. So, in a free-market, what’s expected is that not only that errors and misinformation result in wages above or below equilibrium, but that the equilibrium point itself is constantly changing as both supply and demand for products changes. Given that, my point is that we should be willing to be a little more honest and that means giving up the idea that minimum wage laws always and for all labor groups, leads inevitably to increased unemployment. History itself does not support that simplistic assertion.

That recognition does not detract from a more general critique of minimum wage laws, which is centered on who is best equipped to determine wages – probably not a government bureaucrat, even though a politician might (by accident) get it right.

dalibertarian

No actually a new product or competitor or whatever are not interventions. They are part of the market process. If a natural disaster destroys a factory, this is an intervention. If a government raises the minimum wage, this is an intervention.

The wages are always moving towards the clearing price though which is important. Price fixing can never beat that, in fact it will always be worse. So setting a minimum wage prevents the wage from moving towards the clearing price. When the actors in a market have expectations that are relatively constant, which is what labor markets really do entail (the same labor is being performed day in and day out), we should not expect the clearing price to change a lot.

You say that minimum wage laws do not always lead to more unemployment. I think this is wrong though. If the market should be moving towards a certain wage but it cannot, which it seems to me minimum wage laws would always cause, then eventually the minimum wage law will cause unemployment. If by some chance the government gets it right, it will still be wrong soon.

If you agree markets are the best way to determine wages and that wages at bad levels will lead to unemployment, then you have to agree that whenever a minimum wage law is implemented, it will ultimately lead to unemployment. If it doesn’t then that means the market was already moving towards that wage anyways and the government got lucky.

Any time the minimum wage law “works” the market would work it out anyways. Any time it doesn’t work there is unemployment. I don’t see how you could get around this with the contentions you accept?

jmillsintacoma

OK, I’ll accept your theory that “the government got lucky.” That’s a fair way of saying it. Another way is to say that business was erroneously, or mistakenly, paying wages below the “clearing price.”

As I have said about Henry Ford, one day he discovered that he was erroneously paying wages that were too low. He “got lucky” when he tried doubling his lowest wages and it turned out great.

The free market is trying to get there, but my point is that it’s possible for legislation to give it a push. Refusing to serve blacks in the deep south was bad for business, and the Civil Rights act just gave business a shove in the right direction.

The market will tend to “work it out,” but possibly that might not happen in our lifetimes.

In the original article, Mr. Hammond quotes with approval this – from Murray Rothbard: ““In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment, period.” I’m simply pointing out that Rothbard’s statement is inaccurate. it would be accurate if “the market” and all it’s players always correctly identified the clearing price for labor and if participants in the free market never made errors in judgment.

That brings me to my bigger point – supporters of increasing the minimum wage imply that politicians are BETTER able to discern the “clearing price” than is business. If defenders of the free market object to THAT implication, then they have a much more powerful argument against minimum wage laws.

What’s almost certainly true is that business is more likely to guess at the clearing price than are politicians, and both business and labor have an interest in correctly identifying the clearing price. Politicians really don’t have the same personal interest in judging the correct wage rates, and for that reason, we should not turn over to politicians this important job.

dalibertarian

We aren’t really getting anywhere by continuing this debate so this is going to be my last reply and pretty short.

You are in essence saying that businesses guess at clearing prices. This is not accurate of the market. Through voluntary exchange, the supply comes to meet demand. It is in a producer’s interest to not produce more than is demanded because then he has excess that he cannot sell for consumption. It is in his interest not produce less than is demanded because then he has a shortage. The producers will learn how to bring as close to the number of products to market as they need to not go over or below demand. The clearing price is something he is actively targeting, even though he doesn’t have a concrete number. He zeroes in on it by reducing his surplus or increasing inventory when he has a shortage, and adjusting prices to so compensate.

“The free market is trying to get there, but my point is that it’s possible for legislation to give it a push.”

No, it isn’t. It is axiomatic that price fixing of wages interferes with rather than helps along the process of price discovery. It is axiomatic that, as Rothbard pointed out, forbidding labor from being hired below a certain price creates compulsory unemployment for any manner of work valued below the mandated price. It is axiomatic that government bureaucrats making decisions arbitrarily do not know better than the free market with its pricing system how to efficiently direct scarce resources to productive ends.

Andy Curzon

Spot on Jeremy and to jmills, when you assert:

‘The free market is trying to get there, but my point is that it’s possible for legislation to give it a push. Refusing to serve blacks in the deep south was bad for business, and the Civil Rights act just gave business a shove in the right direction’

you make a grave mistake. The Civil Rights Act not only increased the public awareness that lighter and darker skins are different but also created criminals whilst promoting racism. I know it is counter-intuitive but it is the same as the drugs argument to me. They make a criminal out of the pot smoker by the prohibition.

By NMW you make a criminal out of the employer and employee who engage in cheap labour and the Civil Rights Act opened the floodgates for far more detrimental legislation.

The push is NOT in the right direction. My point is not that is usually is not in the right direction, but that it is never in the right direction. Let alone the fact that humans’ desire for autonomy is so great that sometimes people who think laws are unjust will break them to maintain autonomy in all good conscience and if they go to prison often learn skills there and become career criminals.

The state makes criminals. Anyway I am off point here, I just wanted you to know what a fraud Abe Lincoln was as the Civil War was much more about taxes and Unifying Federalism than slavery. The slavery issue was a boondoogle because public opinion had already swayed in favour of reform. The film Lincoln is an insult to Americans, freedom and especially descendants of those from the south who were not racist and who did not agree to being ordered about by Washington.

jmillsintacoma

True enough, the state makes criminals. The state makes criminals of thieves and murders, people who rape and pillage. That is not a bad thing, and I have never heard a coherent argument for the position that outlawing some kinds of activity is not a good thing.

Most of what everyone does is a negotiated deal. But if you start hitting others, or stealing stuff, we get together, stop negotiating and throw you into the pit.

It might be that the Civil Rights Act simply made criminals of regular business folk, but that would not be your position if you were black, living in Montgomery, Alabama in the 1950’s.

jmillsintacoma

You say that this is “axiomatic.” Why? Because it’s “axiomatic” that businessmen are smarter than politicians? Again, Chrysler during Lee Iacocca’s stewardship is proof positive that sometimes business is wrong and politicians are right.

History might show that it’s unlikely or rare for politicians to know better, but history does not support much beyond that.

I say it is axiomatic because it is. It is a self-evident logical truism that outlawing the hiring of labor below a certain minimum wage prices workers whose productivity is not valued at or above that wage right out of the market for labor. This is just something that can’t be argued with. It is axiomatically true.

Jeremy after having explained things so logically so many times I am sure you are as tired as I am of pointing out simply steps of logic. Would it not be pretty much all encompassing to simply state words to the effect of (as I have done in other words above to jmills):

‘The effect of a price floor does nothing to those not wanting to pay under the floor or those not wanting to work under the floor. It ONLY prevents those willing and able to work for less to do so and employers who need these jobs done at a lower cost from gaining value/profit from these services. So, a priori, the ONLY effect it has is that of detriment and constraint on potential production. There just simply is no single low wage earner who has ever benefited from the floor of a legal wage price’.

Just a point to dalibertarian, your knowledge of certain things seems very adept but do not conflate or confuse productivity with production. I think you do it twice but productivity is specifically how much per unit (hour/minute) is produced whereas production is an overall value obtained as a number by multiplying production by hours worked. They are strongly related but by no means identical. This may seem an elementary point but your comments

‘Either way leads to unemployment, which in turn leads to less productivity’

and

‘Prices convey signals to both workers and employers. You can be assured that in time the labor markets will work out any “bad” wages to maximize productivity’

show that maybe the swapping of the word ‘productivity’ for ‘production’ (or total production to be a pedant) in both cases may help your reader(s) here. I am only aiming to help, your other content is accurate in my opinion and comments insightful to me.

dalibertarian

I agree production would be a better term in these cases, but it doesn’t really affect the overall meaning by using the precise term.

Since productivity is just the rate of production, they are directly related so when we state a relative, rather than quantitative, change in them it doesn’t really affect meaning at all.

Andy Curzon

I see what you mean but all I am inferring is that whether your statement:

‘Either way leads to unemployment, which in turn leads to less productivity’

does or does not produce the desired effect it is still untrue as a statement. One can not assume, a priori, that NMW would change the productivity of the workers already working and in fact it almost definitely would not. But it would without doubt decrease the overall production since less people are working less hours. Again this is apart completely from the concept of productivity.

Productivity is efficency-based whereas production is amount-based, they are in fact Very different as production comes FROM productivity but productivity does Not come from production.

Point made, I won’t labour it any more! Lets just try and get jmills to be honest with himself now shall we?!

dalibertarian

Ok I get what you mean, productivity as in the productivity of the employee. I completely agree.

Yes, that is another good way of making the point I am trying to get across. Thanks for your input.

Andy Curzon

jmills: 3 points.

1: by asserting a new technology’s explosion onto the market as an ‘intervention’ you misrepresent or redefine the term intervention.

2: You keep pointing to the concept of honesty and this is precisely the act with which Jeremy and I are engaging in. Here is my statement that I beg you to refute:

‘Both the initial introduction of a price floor of any kind (NMW here), and it’s increase, can either have no effect at all on an economy (if no-one wishes to work below the set rate: in which case the rate becomes superfluous) or increase unemployment. These are the only two options in theory and in practice.’
Upon HONESTLY realising that the NMW can not intrinsically help anyone you can HONESTLY move forward. PLEASE refute this with logic without inclusions of fanciful empiricisms based on stats of foregone happenings. It can not be done and is not a matter of opinion just as 1 + 1 = 2. It is a fact.

3: Only once you see all intervention as opposing people individual choices, you see new technologies as advancements instead of interventions (in our strict term), and you really see that the NMW CAN ONLY PRODUCE BAD IN EVERY INSTANCE POSSIBLE can you approach this subject honestly.

p.s.: I have read Keynes’ 1936 treatise, and am looking forward to both Hazlitt’s refutation and Mises’ Human Action. Currently I am reading Mises’ Theory of Money and Credit which I deem necessary to provide the logical base from which to apply his later ‘a priori’ and ‘praxaeology’ inclusions. My final point is that of explaining the idea that ‘a priori’ meaning deduced from logic is simply that which is unequivocal and can not not be. To argue with it is to argue with logic. If one wishes to go down this path then all inferences will be as yours above jmills.

jmillsintacoma

OK, first, my point about new technology and such is only that lots of things affect the price of labor and for that reason, the “clearing price” or “equilibrium” price is constantly moving and never known.

The assertion that minimum wage laws “always” cause unemployment assumes that the free market has arrived at the equilibrium point and that therefore raising minimum wages necessarily pushes wage rates above equilibrium. But, in the real world, we never arrive at equilibrium. Instead prices and wages are always moving and the equilibrium point itself is constantly changing.

Once you know that, then the data-out from the classical model changes. If we can’t assume equilibrium exists, then the model cannot tell us if increased unemployment results from forcing wages up.

Now, I would direct your attention to this statement you made: “[A minimum wage] increase, can either have no effect at all on an economy (if no-one wishes to work below the set rate: in which case the rate becomes superfluous) or increase unemployment. These are the only two options in theory and in practice.”

As to that, as I’ve indicated the historical experience of Henry Ford directly contradicts your statement. Henry Ford increased the minimum wage at his factories, and discovered that it 1) increased employment, 2) increased productivity, and 3) increased the profitability of Ford Motor Company for its stockholders.

Had Henry Ford never contemplated the idea, and if the legislature simply commanded that Ford double its minimum wage, there is every reason to believe that Henry would have nonetheless discovered that it 1) increased employment, 2) increased productivity, and 3) increased profitability of Ford for its stockholders. I mean, the truth is the truth, right?

The assertion that increased minimum wages ALWAYS and INEVITABLY lead to increased unemployment is predicated on the assumption that business is never wrong, and politicians are never right. That seems rather unconnected from reality.

Here is another real-world example. Several decades ago, Lee Iacocca was tapped to head up Chrysler. He needed money, but no private lender would lend because virtually everyone believed Chrysler would fail. The US Government stepped in and made the loans. We know the history. Chrysler succeeded and paid back all the loans with interest. Students of history thus recognize that sometimes – as “dalibertarian” says – the government just “got lucky.”

Looked at it from a different angle, sometimes business is just wrong. In that circumstance, raising the minimum wages would shove business is the right direction.

Using the classical model, if business persistently sets wages below the “equilibrium” or “clearing price,” (something that could happen due to business misjudgment) then forcing wages up increases employment along with wages. Indeed, that’s exactly what the classical model predicts will happen if wages are below equilibrium.

The classical model has nice, clear lines that intersect on a graph. The classical model demonstrates how employment shrinks if wages are forced above the intersection. But, defenders of the free market should not delude ourselves into thinking that reality in business is a simple matter of referring to lines on graph paper. Wages, prices and employment are far, far, more complex, and subject to a variety of mistakes, and misinformation, all of which make the classical model kind of limited in its application to the real world. (Hey, it’s a “model,” not reality.)

Andy Curzon

Forget this classical model obsession and the propensity to keep mentioning equilibrium prices. These are not unimportant but detract from my point.

Take 100 businesses that would want to employ some workers at less than is legal under the NMW. If they can not do this, nothing matters but the fact that they can not do this. And the result from this is that their profits decrease (as you point out) and the worker is left unemployed. So yes unemployment IS the only possible outcome paired with NO possible benefit.

Relating this to your misinterpreted Henry Ford explanation, he could only raise wages ridiculously if either he had miscalculated them in the first place (i.e. had set them below a level resulting in the highest profit for himself) and thus it would have been more beneficial for him to charge more in the first place. So if some people miscalculate and some don’t how in any way is there any justification for banning work at a certain pay? How can it be justified and why at base do you strive for your liberty to be prized from you? Do you not see that is what a prohibition is?

Forget models and graphs, lets be frank and talk logically.

And as for this misinformation, who is to say it would be any less with imposition of the NMW or any other intervention? Do you see? From every angle this is a scam. Please relinquish you argument mode setting and view this with a new perspective, the perspective of logic.

Once again, how would anyone possibly benefit from NMW let alone MOST people in the LONG-RUN?? Please, without silly specifically misinterpreted past events explain to me conceptually how it is even possible for there to be ANY benefit from NMW? It is a prohibition from something that is wholly beneficial. Come on!

Jeremy can you help here, I am struggling to repeat myself again.

dalibertarian

You’ve done much better in one response than I have in all of mine. Great job!

Andy Curzon

thanks dude and sorry in advance for the apparent dig above. It is only meant to help, I respect your position but for this one point.

dalibertarian

No problem. I replied to your reply. I agree with what you said. I was talking about if the market were in jmill’s hypothetical conditions. In his hypothetical people were being paid much less than they produced. The minimum wage wasn’t bringing their wage to the level where the company was at a loss. It was bringing it to the correct level. I don’t think his hypothetical example is even theoretically possible but I entertained it just to point out that even if it happened there would still be unemployment elsewhere, and the fact remains in his concrete examples which supposedly support the hypothetical ones, it ended up being the market correcting the problem.

“Take 100 businesses that would want to employ some workers at less than is legal under the NMW. If they can not do this, nothing matters but the fact that they can not do this.”

Well put! And there it is. It is a self-evident truth that therefore minimum wage laws must create unemployment.

dalibertarian

I go against what I have previously said and reply.

Austrian economists will be the first to tell you that reality does not reflect the graphs. That is why we try not to overuse models in explaining economic phenomena. But the ability of markets to clear according to demand (supply and demand working) is well demonstrated both from an a priori standpoint and an empirical standpoint.

It seems to me you are taking what can happen on a micro level (business miscalculation) and assuming that it constantly happens at the macro level. But at the micro level it is in the employer’s interest to productively employ as many employees as he can. This means he will work to get the wage to the level where he can actualize this preference. The laborers want to work for the best wage they can. The best wage they get offered is the one they take. If it is too high for the business to maximize his production he will lower it and hire more workers.

I agree that both the suppliers and demanders make mistakes in the prices they ask for. But to mutually benefit they have to come to a level of agreement and that is what markets facilitate. Whenever prices are fixed you remove the mutual benefit and force one side of the arrangement to benefit more than the other.

As Jeremy has pointed out, even if the minimum wage were by chance to help out in certain jobs, there will be unemployment in all those industries where people are employed where their productivity does not meet the wage they are being paid. Those are the workers who will suffer and become unemployed. There is no “one size fits the smallest” solution, other than to have the minimum wage be whatever the current lowest prevailing wage in the market is. Anything else is guaranteed unemployment.

Andy Curzon

Sorry dalibertarian but the comment

‘..even if the minimum wage were by chance to help out in certain jobs, there will be unemployment in all those industries where people are employed where their productivity does not meet the wage they are being paid’

is a mild fallacy since the NMW CAN NOT help out in certain jobs or any, INTRINSICALLY. Apologies for the capital letters but we have been through this. The simple fact that an employer has no incentive to pay more than his employee produces means that the imposition of the price floor will NEVER lead to people being paid more than they produce unless the company accepts losses and fails.

Is this not childishly elementary? Please lets at least come to the understanding that a price floor can not ever benefit an employer, and employee or the profits of a company as a whole and thus an economy. This is key.

dalibertarian

“the wage they are being paid.”

I think you interpreted that differently than what I meant. I meant that those workers who productivity didn’t meet the minimum wage, which is what they would have to be paid to still have a job after the minimum wage is implemented. I agree that the employer will lay off some of those workers as soon as he has to pay them more.

“even if the minimum wage were by chance to help out in certain jobs”

By this I was referring to jmill’s contention that if a business owner had miscalculated wages, and the minimum wage was by chance what the clearing price was for the wages it would help those particular workers. It would maximize productive employment to be at the clearing price. I don’t think it has ever happened, or will happen, and regardless all those employees in the economy who aren’t worth the minimum wage will be laid off. This is what I meant.

I don’t think a price floor can ever benefit any one in the economy. It by definition interferes with the market being able to clear. Hypothetically a price floor could work for a while when the prices are seriously wrong and the floor is exactly where the market would clear, but I don’t think the prices are ever that miscalculated in the market anyways. jmill’s examples are of the market adjusting anyways, not the government stepping in and “saving the day.”

Hope this clears up what I mean. I’m simply accepting that if the conditions in the market were exactly as jmill’s supposed then perhaps a price floor may “work” but it won’t work very well or for very long and will have a bunch of negative consequences in addition to any problems it “fixes.” The way markets work pretty much prevent those conditions from actualizing in the first place.

Andy Curzon

We are almost there but the final step is to see that when you suppose

‘I’m simply accepting that if the conditions in the market were exactly as jmill’s supposed then perhaps a price floor may “work” but it won’t work very well’

the statement is incorrect. Please do not look at this as a criticism, rather a taking apart of the last fallacy on this topic otherwise you may not find this ‘honesty’ jmills is so keen on.

Think not so much of the statement’s fault but the logical inferences of the mistake.

Lets look at exactly what would happen if jmills’ supposed happening were to come to pass from the mind of the person who makes the decision whether to offer the employee work in the first place, the employer. Now how does he decide who to employ and for how many hours? By looking at costs and revenue, or profits and loss. By the time he is considering specific people to interview he has already allotted a budget for ‘staff costs’ or whatever he names it. So looking at the moment before and after the imposition (or increase) of the minimum price to pay for labour we see that if the workers below the floor are offered a job before the minimum wage bill is enforced then as it hits the employer will still have the same figures in front of him and will now not employ the men below the floor assuming he is not to break the law.

The Henry Ford story where he increased the wages of his workers is a different issue since his decision changed. Do you see that in the mind of all producers their decision could not change either given that their budget for wages has also not. If you have the money to pay an extra worker at a lower wage but not one above, then if the barrier is there you will not employ him or anyone else that you wouldn’t otherwise have done.

Hence why I am so confident in asserting that it is impossible in any circumstance for any employer with lower than floor wage earners to react in any way other than to stop paying the bottom portion of his staff. Do you see My point?

One more time just in case I am terrible at explaining. You assert:

‘By this I was referring to jmill’s contention that if a business owner had miscalculated wages, and the minimum wage was by chance what the clearing price was for the wages it would help those particular workers’

The last part suggesting that the producer himself would have changed his mind about these workers and gone over budget is a miscalculation. In both circumstances the producer/employer is faced with the same number and in both cases he will employ the most amount of people who gain him a profit.

Really it is just an explanation of why the only effect from the NMW is less employment always and more employment exactly never. Unless a freak dream came to a significant amount of the producers the night before the imposition of the NMW telling them either to break the law or to pay these people more and lose profit in trust that somehow in this case less profit is better than more.

Again this point is small and particular but surely crucial.

dalibertarian

Ok. So we are talking about the employer whose employees would be making more had the wage been at the level where the market clears. Now the minimum wage comes into effect. Unless the employer actually decides to change his mind about his payroll budget, he will still lay off some employees to stay with in his budget, and thus even under these strange conditions, there would still be more unemployment. If the employer suddenly changed his mind, raised his budget, and kept on the workers or maybe employed more, we get less unemployment – but there is no reason to assume this will be the case and every reason to assume it will not be.

I’m inclined now to agree with you. I never even bothered to think about it from the budget perspective, but now realize it is probably one of the most crucial things to consider. This is why the persistence of thinking in models leads to problems because we forget how decisions are actually made.

Yes the point is small and probably not of much practical difference but it helped me to see a way to approach the problem differently.

Andy Curzon

After applying this to all the intervention I just see the free market as an absolute. Either you allow trade freely or you do not.

In a sentence I can not yet argue against the summation I heard once that

‘..the wealth of an economy over time increases in direct proportion to the liberties bestowed upon its practice.’

jmillsintacoma

In the quiet of the night, you should sit and ponder how “free” should be the “free market.” I know a guy who regularly swindles people, and justifies it as simply better deal-making.

The free-market is not rule-free. There is an ongoing and fertile discussion taking place here and in many other places about what kind of rules make sense to enforce.

I don’t think there are simple answers.

dalibertarian

A free market is exactly what the name implies – a market left 100% to its own devices to function with no intervention (the real definition not the one you made up in your earlier comments) or regulation whatsoever.

In a free market “injustice” is taken care of by competition. I can see you now saying “well what about when some big bad business makes a big bad monopoly and decides to rip all those consumers off and pay their workers a sub-shitty wage.”

Well, without state power such monopolies cannot exist. It is a fact that all the monopolies and oligopolies that have ever existed that did such a thing used state power to stay on top. They got the state to force businesses in their industry to have to pay for expensive regulations (such as new “environmentally friendly” equipment) and to set up other barriers to entry, such as not allowing companies that provide the input materials for production in that industry to supply new companies – or better yet to take over the companies that supply the inputs. Of course they did other things. Well, then as the official story goes, the government (yes the same government that stepped in to help those monopolies. You have to understand that now the government feared the nasty progressives more than they wanted the businessmen’s money. The government wants to stay in power first and money second.) broke them up with anti-trust laws. Well guess who sets up the monopolies today? That’s right the same government that said monopolies were bad back in the early 1900s. But wait, there is more! Apparently as long as the government says a monopoly is good (like utility companies) there is nothing for us consumers to worry about.

Of course every single time the government took action in stopping these “robber barons” and setting up these “glorious good monopolies,” they were really just trying to justify their existence. The “robber barons” would not have existed if it hadn’t been due to the government.

You want an example of the type of monopolies that exist in the free market? Think of Standard Oil. At one time Standard Oil had a huge monopoly in the oil industry, but guess what accompanied that? Oil prices were pretty much the lowest they have ever been. If a monopoly wants to stay in power in the free market then it has to do so by staying the best at producing what consumers want (which kind of includes offering the best wages to workers by the way or they will lose them to their competitors).

For any “market failure” example you could give us we could clearly demonstrate how that “market failure” is really a hidden effect of government intervention. The simple fact is that free markets by their very nature clear and when they don’t in practice it is because they are not really free.

PS Just about the only objection you could give about the free market that I couldn’t give a great answer to would be the “Tragedy of the Commons.” This isn’t because it is a problem that markets cannot solve well. Government can’t solve it either, and its solutions are much worse. The “Tragedy of the Commons” isn’t really even a side effect of markets. It is just the nature, of well, nature.

dalibertarian

In addition to my other reply I think you are correct in a way in saying “The free-market is not rule-free.” Now of course I don’t mean in your sense in deciding “rules to enforce.”

What I mean is that a free market is based on voluntary trade. It goes along with the non-aggression principle. Beyond the non-aggression principle though, there are no rules in the free market. As long as everything is voluntary, that is all there is to it.

BTW, the non-aggression principle includes fraudulent behavior. Defrauding your customers by lying to them to steal their property is an example of non-violent aggression. This includes false advertisement, which is lying to customers about what your product does/is to steal their money. False advertisement by definition makes a voluntary transaction involuntary, and therefore theft, because only one party is actually trading the item they say they are. The worst type of fraud: fractional reserve banking.

jmillsintacoma

You say that there is no reason to assume the employer will change his mind about his budget for labor. Why? Some likely would, some would not. So really, what thinking people should say is that we just don’t know. If employers did change their labor budget, then raising the minimum wages would help people working in those businesses. If employers did not, then workers would be hurt. This is why I think raising the minimum wage helps some and hurts others.

The argument against raising the minimum wage is that no one knows the total effect – including the politicians advocating for increases. And, because it is as likely to hurt people as help, and because it’s impossible to fairly trade off, or even measure, the benefits against the detriments, politicians should stay out of it.

By recognizing that some people actually could benefit, rather than taking the unyielding position that it ALWAYS increases unemployment and ALWAYS hurts all people, it seems to me that others are more likely to accept one’s criticism of such laws.

dalibertarian

It hurts the people who are not worth the minimum wage no matter what. I don’t know why you don’t get that. Do you really think that employers can just, all other things equal, raise the wage they pay their employees and there won’t be any negative results? As Andy has pointed out we don’t know if the increased wage will affect productivity. In fact we have every reason to assume that it would work in the opposite way. If worker productivity increased, then the employers would be willing to raise their wages. If it doesn’t affect productivity, as soon as the owners get tired of taking reduced profit they will lay of the workers anyways. They won’t be able to hire any new workers at wages below the minimum wage and thus may not be able to start new possible profitable production which means everyone in society misses out on those opportunities also.

Anyways, even if we can’t agree that the minimum wage causes more harm than good economically we can at least admit that it is unethical to tell businesses what they MUST do with their funds right? Or do you think that the possibility of the minimum wage (in your opinion not mine) leading to net benefits suddenly makes it justifiable in some sort of utilitarian (ends justify the means) way?

As a side note, we never claimed it hurts all people, unless you mean in the sense that they miss out on consumption that lower wage workers could produce. It only directly hurts the people who aren’t worth the minimum wage. It seems your position is filled with assumptions, not ours. It isn’t much of an assumption to think business owners will not increase their payroll budget in response to a higher minimum wage. Actually, what is a big assumption is that they would increase their payroll budget, when they had no intention of doing so before, because the government is forcing them to pay their workers more.

There is no sense in continuing this argument if everyone is just going to hold steadfast onto their position. For myself, I’m just going to say I want to agree to disagree and leave it at that. Good day.

jmillsintacoma

I think there’s been movement. You opened by saying: “Anyways, even if we can’t agree that the minimum wage causes more harm than good economically . . .” Let’s explore that.

This sounds like you are agreeing that raising the minimum wage, hurts those whose productivity won’t justify hiring, but helps those whose productivity would justify a higher wage, but who work for less due only to supply and demand for labor.

Now, if raising the minimum wage hurts some, but helps others, how can we quantify the level of “harm” and “help” so as to decide whether it does “more harm than good”?

When there is a proposal to raise the minimum wage, what exactly do you say to all those who would be helped?

Dude, if a worker’s productivity would be justified by a higher wage, then a minimum wage law would obviously be of no benefit to them. The whole purpose of a minimum wage law is to force employers to grant to those whose productivity is NOT valued at such a wage this price for their labor. And it is axiomatic that it outlawing jobs and pricing low-wage earners right out of the labor market is more harmful than NOT outlawing jobs and allowing low-wage earners to obtain employment. This is a self-evident logical truism.

jmillsintacoma

Is it your opinion that a well-educated, very productive person could not possibly be employed for a very small hourly wage?

Is it possible for a person generating, say, $100 an hour of profit, to be employed at $5 an hour due to factors beyond his or her control and due to things other than his or her productivity?

If so, and if the law suddenly required paying $15 an hour, why would that raise in the minimum wage be “of no benefit to” this worker?

“Is it your opinion that a well-educated, very productive person could not possibly be employed for a very small hourly wage?”

No, this is NOT my opinion. Nothing I said implies that it is. It is quite possible for this to occur, such as a result of government interference in the market, i.e., the business cycle and the consequences of the malinvestment and misdirection of resources during the boom years. We see this in current economic conditions. Far be it from me to deny the possibility of something we all can perceive exists in present reality.

“If so, and if the law suddenly required paying $15 an hour, why would that raise in the minimum wage be ‘of no benefit to’ this worker?”

Dude, we’ve been over and over and over and over this. It wouldn’t benefit him BECAUSE IT WOULD PRICE HIM RIGHT OUT OF THE LABOR MARKET. Obviously.

dalibertarian

I just replied to him what I think pretty much covers his argument and ideas in depth.

I pointed out that even if his whole economic argument were correct, the minimum wage would still cause those not worth the minimum wage to suffer. That suffering, at least from a meta-ethical perspective that is not utilitarian, would automatically render such a law unethical. If he can’t agree with that then he is simply being stubbornly illogical.

Yes, it’s an “ends justify the means” argument which, as you rightly said, even if true, which it isn’t, we must reject as immoral.

dalibertarian

“Is it possible for a person generating, say, $100 an hour of profit, to be employed at $5 an hour due to factors beyond his or her control and due to things other than his or her productivity?”

Yes for any number of reasons. Yes it is possible that a business owner has “miscalculated” the value of this employee or is purposely keeping the wage down. In a free market these problems could be solved by another firm offering a better wage for the job. Or maybe the owner will realize he should raise the wage. There are a number of causes for such a problem, including business cycles, and a number of ways the market could solve such a problem.

“If so, and if the law suddenly required paying $15 an hour, why would that raise in the minimum wage be “of no benefit to” this worker?”

No it would be of no benefit. As Andy pointed out this would require the business owner to change his payroll budget. We can’t assume that he will either raise it or leave it be (though I would say it would be more likely he would leave it). Therefore we simply don’t know how the minimum wage would affect such workers, but unless the owner responds by raising his payroll budget, some of those workers will not be worth paying to the owner at the higher wage and he will have to lay them off. Those will be the least productive of the employees that he is paying at that wage.

Now, for the sake of argument, let’s assume that some or even most or even all of the employers with employees being paid a wage that you would consider unjustified due to their high level of productivity, would raise their payroll budgets to accommodate the new minimum wage bill that is about to pass. Now the minimum wage has passed and is starting to be enforced. Those workers mentioned above are still employed. But all the workers who were previously valued correctly in being paid below the new minimum wage have now lost their jobs. No firms can hire anyone for any project where the productivity of the employees would justify a wage only below the minimum wage. Now let’s furthermore assume that the number of people in the former group (worth a better wage but paid a worse one) outnumber those in the latter group (not worth a better wage). Does this all of sudden justify the minimum wage? I would say it absolutely does not. All those in the latter group, who previously were able to work and at least provide themselves with some way to survive, are now unemployed. You can’t seriously think that even if it were the case that many more would benefit than would suffer that this justifies the law. The fact that such a law creates such suffering should make it unjustifiable in the first place, regardless of the benefits it brings.

But regardless, the conditions you have selected will never actualize in reality anyways. It would require absurd things to happen, such as would Andy said: All the business owners employing less than minimum wage workers have to have a “sudden realization” the night before the minimum wage comes into effect that they have not been paying their employees enough and should raise their payroll budget. Such a thing actually happening, even you have to admit, is absurd.

So this is what it boils down to I think:
1. Your economic argument is false in the first place. The minimum wage causes disproportionate bad to any good that it could cause. Furthermore, any good caused by the law is really caused by the business owner’s changing their minds if such a thing happens.
2. Even if your economic argument were 100% completely true, any said minimum wage law is still unethical because it will, no matter what, still cause suffering.

So I guess what I am saying is that your whole argument would still be pointless even if it were true, though it is most certainly not!

jmillsintacoma

This is good stuff. It shows at least that the issue is more complex than was first posited.

I would point out that a worker who produces $100 of profit an hour, who is paid $5 an hour by agreement is not a demonstration of business “miscalculating” wages. It is simply the wage prevailing in the market resulting from supply and demand for labor. Every business pays employees less than their productivity. That’s how business makes a profit. And, there is nothing wrong with that. It is the result of a negotiated deal and therefore beneficial to both sides.

Part of what owners do is to show people how to use their time to best effect, and that happens by maximizing profitability of workers, for which the business owner also gets paid. And, indeed that’s a good thing and the core motivation for directing resources into more and more productive activity.

The $5 wage is not a “problem” to be solved by the free market, and it’s not true that the free market will bid up worker’s wages to their level of productivity. No owner of a business can pay workers $100 an hour for work that results in profit of $100 an hour. If you do that, you never make money, and eventually starve.

When the minimum wage demands $15 an hour, nothing about that requires that the owner lay off anyone. It may be that the owner simply accepts a smaller profit (pay check).

Let’s analyze the $100 an hour of productivity. Before the minimum wage, it’s split with $5 to the worker, and $95 to the owner. After the minimum wage is implemented, it’s split $15 to the worker, $85 to the owner. And, business goes on.

That is, of course a real benefit to the worker, whose wage has tripled. It is a real cost to the owner, whose pay has diminished. But, nothing implies a change in the basic business model, or a reduction in employment. If you are building cars, and the price for sheet steel goes up, no one says that causes unemployment. It does cause a reduction in business profitability. But, the owners may simply accept that their costs of doing business has gone up and accordingly the owner’s earnings are going down.

In short, raising the minimum wage simply divides the business revenue differently. It’s like a business who’s owner finds one day his employees unionized and are demanding more in wages. That is going to mean a reduction in the owner’s take, but it does not require that the business close shop or fire workers.

“This is good stuff. It shows at least that the issue is more complex than was first posited.”

No, it isn’t. It’s really quite simple. You were wrong from the beginning. You’re still wrong. You’re still just spouting nonsense, such as “Every business pays employees less than their productivity. That’s how business makes a profit.” So, once again, you say on one hand you understand that in a free market, prices tend towards a clearing price where the total supply is able to meet the total demand, but then you go and say something like this, which denies that this is so for wages, which are just a price for labor. To say that businesses profit by paying their employees less than their productivity is worth is to say that all wages everywhere are held below the clearing price and somehow magically stop at some point, somehow, from tending towards equilibrium. It’s just the same nonsense you repeated earlier that I already addressed the fallacy of. REALLY, man, this is getting old.

But *sigh* let’s look even further into your nonsense to show how it is nonsense:

“it’s not true that the free market will bid up worker’s wages to their level of productivity. No owner of a business can pay workers $100 an hour for work that results in profit of $100 an hour.”

More nonsense! You are again denying that wages tend towards the clearing price. If a worker’s productivity is valued at $100, then his wages will tend towards $100. Why wouldn’t it? Why wouldn’t the free market bid wages up to such a price, just as any other price is bid up through the very same law of supply and demand? You don’t bother explaining this enigma, because you can’t, because it’s sheer nonsense.

Again, it’s superfluous, but let’s continue even further down your rabbit hole:

“Let’s analyze the $100 an hour of productivity. Before the minimum wage, it’s split with $5 to the worker, and $95 to the owner….”

Stop right there. No! No! No! You are simply defining the worker’s “productivity” as whatever profit the business owner makes, but that’s not the value of the worker’s productivity. Obviously, there are a lot of other factors of production apart from this single worker’s labor. The business owner has a lot of other expenses, such as capital investment and other employees to compensate, in addition to being the one taking on the risk. To say that since the owner made $100 profit, therefore that represents the value of the worker’s productivity is a non sequitur, and its from this nonsensical false premise that you construct your argument.

Dude, how many times has dalibertarian already corrected you on this? How many times can you keep repeating the same things over and over and over, and have I and others clearly demonstrate to you your errors, and yet you just persist and persist and persist in repeating those same fallacies over and over and over, from the same false premises, totally ignoring everything that’s been told to you repeatedly. You are seriously uninstructable.

We are back to how I started this comment. No, man, it isn’t “more complex than first posited”. It’s just as simple as it was when it was first posited, and you are still just as wrong as ever.

jmillsintacoma

Wages are a result of supply and demand for labor.

The price for business’s product is a result of supply and demand for its product. What people will pay for the product is wholly independent of what business pays for the labor to produce it, right? Indeed, the purchasers of the product neither know, nor care much, what it costs business to produce the product they are buying.

Business profits are the difference between what it sells stuff for and what it pays to produce it.

If you are selling cars, and people will pay $1,000 for the car, you can’t be paying out $1,000 (or more) in costs of production, right? If you do that, you starve.

Let’s consider a case where, after considering all other costs of production, there is $100 an hour to to pay people. In such a case, the business owner can’t possibly pay his labor $100 an hour because that leaves zero profit for the owner, who would then starve.

Let us imagine that, after considering the prevailing wages resulting from the supply and demand for labor, the owner is able to get competent workers for $5 an hour.

That, of course, leaves $95 an hour for the owner.

If a new minimum wage law forced the owner to pay $15 an hour, leaving only $85 an hour for the owner, what reason is there to believe people would be laid off and the business closed?

The “clearing price” for labor has not a thing to do with the productive capacity of labor, right? It’s a function of supply and demand. So, in an economy with lots of unemployed people, a worker capable of turning out stuff that (after all other costs of production) is worth $100 an hour, cannot, simply on account of his productivity, command $100 an hour, right? His wage rate is a function of supply and demand, not productive capacity, right?

I have no problem with profit. As I say, that’s the core motivator for focusing production on more and more valuable things. So, when an owner pays $5 an hour to get product worth $100 an hour, I don’t have any problem with that. Indeed, because it’s all a negotiated deal, it’s beneficial to a) workers, b) owners, and c) consumers.

But, because business runs on profit – the difference between costs and revenue – it’s possible that an increase in labor costs results in nothing more than a reduction in what’s left for owners.

For GM, an increase in labor costs is no different than in increase in sheet metal costs. Both affect the profitability of GM, but when GM is faced with an increase in sheet metal costs, it’s not “axiomatic” that unemployment results.

Trying to reason with you has proven beyond any reasonable doubt a waste of time. You just repeat the same errors over and over, apparently in the hope that repeating nonsense enough times will make it somehow valid. It doesn’t. We’ve been over this. I defer to my previous comments.

dalibertarian

“I defer to my previous comments.”

Lol. This is epic.

jmillsintacoma

I guess what’s troubling to me is that you seem to be saying that the free market will tend to bid up the price of labor to its productive capacity, and will tend therefore to bid up labor to the price where all profit is extinguished. What economic theorist or theory supports that?

Good Lord. What I am saying is that the prices in a free market will tend towards their clearing price, and that wages are no different. It’s called supply and demand. Ever hear of it?

jmillsintacoma

I recognize that wages will tend toward the “clearing price” where supply intersects with demand for labor. What I’ve never heard is that this price equates to worker productivity, and that if a worker is capable of producing $100 an hour of stuff, that his wages will tend toward $100 an hour.

As a matter of common experience, lots of people are paid for very long periods of time a wage that is way below their productive capacity. For example, I work as a lawyer. In my profession, there are lots of people called “Associate Lawyers” or “Junior Lawyers.” They are paid way, way less than their actual billings. Often, the imbalance between what they bill out and what they personally take home lasts for the whole career of an Associate lawyer. Indeed, in any given year, a good associate might even take a cut in pay depending on whether there is competition from new lawyers seeking to join.

I’ve never heard of any theory that would suggest, over time, the Associate Lawyer’s wages will tend to get bid up to the amount of their billings, which would mean, over time, the firm partners’ profit would tend to decline.

My economic training says that the price of labor (wages) is a function of supply of, and demand for, labor. I’ve never heard that it’s a function of productive capability.

There must be some standard text on economics that shows how wages tend toward productive capacity, but I am just unaware of it.

“I recognize that wages will tend toward the “clearing price” where supply intersects with demand for labor.”

No, you don’t. You really, emphatically do not! Not when you contradictorily try to argue that wages are instead determined by whatever net profit the business owner makes minus whatever the owner chooses arbitrarily to pocket for himself. This is contrary to the idea that wages are determined by supply and demand. You can’t have it both ways. Rather, the owner must pay his workers the wage that they are willing to work for. If he just chooses to pay them some arbitrary number way below the clearing price, they will just quit and go work for his competition. Why you think they would not is beyond me. And if after making payroll at the going wage the owner finds that he has no profits or is in the hole, then he goes out of business. Guess what? That can happen in a free market, too. It’s how the market determines how to efficiently direct scarce resources towards productive ends. Why you don’t consider this rather elementary observation, either, is likewise beyond me.

“They are paid way, way less than their actual billings.”

Why do you equate the amount of a junior associate lawyer’s billings with the clearing price of the labor of a junior associate lawyer as determined by the supply of capable junior associate lawyers and the demand for their labor? This is as puzzling as your assumption that worker’s wages in whatever business are determined by the owner’s net profits minus whatever arbitrary amount he chooses to pocket for himself and, further, that this arbitrary wage is at the same time equivalent to the clearing price for this kind of labor in his industry. I don’t know where you come up with this nonsense.

“My economic training says that the price of labor (wages) is a function of supply of, and demand for, labor. I’ve never heard that it’s a function of productive capability.”

You cannot possibly believe that wages are determined by supply and demand for labor in a way that is totally irrespective of the productivity of the worker whose labor there is a demand for. That is to say, you cannot possibly believe that a worker capable of producing 10 widgets in an hour would under the free market pricing system, according to supply and demand, tend to earn the same wage as another worker employed to do the same work but who is only capable of producing 2 widgets per hour. It goes without saying that the productive capability of the individual laborer is a factor, on the side of the supply of labor.

jmillsintacoma

Seriously, I do. Whether the worker can produce 10 widgets or 2 is not the issue, it’s whether there is someone else who can build the same number willing to work for less.

All other things being equal, obviously an employer would be willing to pay more for a worker who can produce 10 widgets, but all other things are never equal.

As I said, in the legal profession, an experienced well-trained “Associate” lawyer may or may not be able to hold his wage rate as between himself and a totally green law school graduate. Clearly, a well-respected Associate uses experience (as best he can) to try and hold up his wages, but as to the final wage he can command, it’s determined by supply and demand, not productivity. An experienced, well-proven, respected employee may simply have to take a pay cut because others are willing to work for less.

We have all seen college athletes who enter the pro draft and all of a sudden, proven veterans agree to a wage cut. The veteran’s proven productivity means nothing if someone who might do the same, or nearly the same, is willing to work for less.

This is why, long ago, economists determined that wages are a function of supply and demand, not productivity.

After all other costs of production, a worker able to generate $100 of profit for an employer will be paid $95 if there is no one similarly situated willing to work for $94 or less. That same exact worker will be paid only $5 if there are others similarly capable willing to work for $5 or less.

The free market does not bid up worker’s rates to their productivity, which is to say, the free market does not tend to eliminate all profit. On the contrary, the whole tendency and purpose of the free market is to maximize profit, signaling that business is maximizing consumer satisfaction.

Truthfully, the core calculation has to do with profitability, not productivity. A rational employer will prefer to hire a worker who can produce 8 one-dollar-widgets an hour who will work for $2 an hour, to a worker who can produce 10 one-dollar-widgets an hour, but who insists on being paid $8 an hour. The former worker generates $6 an hour profit, the later generates only $2 an hour profit and accordingly – to the employer – the former is more valuable than the latter. That’s so even if the latter can produce more widgets per hour.

jmillsintacoma

Now, then, let’s apply all this to minimum wage laws.

Let’s imagine a pool of workers, perhaps late 30’s or 40’s in age, who have kids, own sailboats or motorcycles and such, who have transferable job skills and experience. They can each make 10 of these $1 widgets an hour. But, because of their opportunities to do other things – go sailing, play ball with their kids, etc., these workers will only suffer through working at the widget factory if paid $8 an hour.

Another group of potential workers is fresh out of high-school, without any real experience or transferable skills and relatively few job options. Because of that, this younger group is willing to work for $2 an hour, but can each only produce 8 widgets an hour.

A rational employer will hire the second group. They all generate $6 per hour of profit, rather than the $2 per hour of profit generated by the older group..

This means the business owner finds that he is stuck making only $5 per hour, per worker, of profit. (Still greater than hiring the older workers, but not as much as the owner made without minimum wage laws.)

Why would that result in unemployment, rather than simply a cut in the pay for the owner?

Why would not all the workers receiving $3 per hour (rather than $2) not be greatly benefited?

Now, having gone through that exercise, it’s apparent that the young workers benefit, but only at the expense of the owner. One can fairly ask whether it is the proper province of government to advantage one group of people over another, but certainly this exercise cannot be squared with the idea that minimum wage can have as it’s ONLY logical result the creation of unemployment.

I believe this is why there is little or no historical evidence showing that increases in the minimum wage lead to higher levels of unemployment, even though legislatures have been raising minimum wages for a long, long time.

I can’t really responsd to complete nonsense that has nothing at all to do with reality. I will concede, however, that in fantasy worlds where things like the law of supply and demand and logic don’t apply, minimum wage laws could be enacted that don’t price low-wage earners right out of the market. Pigs could fly, too.

In the real world, the answer to your question would be that the minimum wage law would result in unemployment because outlawing jobs pretty much by definition makes them go away, assuming people don’t just ignore the law. This has been explained to you ad nauseum.

jmillsintacoma

Well, the reality is that in the long history of minimum wage laws there is no documented evidence that increases are followed by increased unemployment.

If reality is important, then it seems incumbent on someone to explain why long history doesn’t seem to square with the theory you advance.

Economics is a social science, not a “hard science,” but still if the predicted results of a theory never seem to square with real-world data, most scientists would begin to think their theory could be flawed.

By pointing this out, I’m not trying to insult you, but merely trying to prompt a more complete look at the problem and more thoughtful analysis. It may be that there is some explanation for the disconnect between historical data and the predicted results of your theory.

Another explanation is that – as I have suggested – when minimum wages are increased, the result is simply that business owners are forced to accept a reduction in their profits and that increases therefore don’t have to cause unemployment.

If so, that doesn’t mean there is no valid objection to raising the minimum wage. It does mean the objection is different than one based on increasing unemployment.

I think, like Einstein’s theory of relativity, this is not easy stuff, and is, in some respects counter-intuitive. You have to walk through the math carefully to understand it.

It is a self-evident logical truism that the effect of outlawing jobs is unemployment.

It is equally self-evident that business do not operate as charities. Ergo, affected businesses throughout the economy are not going to just accept a loss of profits and leave it at that, but will attempt restructure in some way in order to maintain them, e.g., laying off the least productive members of the work force whose productivity isn’t valued at the higher wage.

jmillsintacoma

If it is a “self-evident logical truism” that the effect of rising minimum wages is higher unemployment, it’s odd that we don’t witness that effect in the real world. But, maybe that puzzling fact is immaterial to your thinking and your theory.

When the price of sheet-steel goes up, GM does not respond by laying off workers. If the cost of labor goes up, I don’t see why they would not respond in similar fashion because, as to GM, both are simply costs of production.

And, by the way, minimum wage laws don’t outlaw “jobs.” They outlaw rates of pay. That may or may not result in a loss of jobs depending on circumstances.

What minimum wage laws actually say is that if you are working at minimum wage, your neighbor can’t compete for your job by offering to do your job for less. It thus restricts a form of competition for jobs based on wages.

The different factors in production are not homogenous. You can’t simply substitute one factor for another because they do different things for production. You need all of them to produce something. They are all valued on their own, not when looking at the total profit and costs. Therefore, we should expect that changes in different factors lead to different responses by owners.

What businesses do when input costs go up is raise the prices of whatever they are selling, be it a capital or consumer good. If they responded in the same way to a new minimum wage law, they would have to raise the price of the final good. This would still hurt the workers who make minimum wage. Why? Because that offset in final prices hurts people who make a small income more than those who make a large income. It’s like saying, in terms of hours, the employee has to pay the same amount of hours of work for the goods as he did before, or possibly even more, and is in no way helped.

This goes back to the is-ought fallacy. Just because something is done someway does not make it what we ought to do. Furthermore, those examples you pointed out lead to inefficiency in markets, not efficiency. It’s kind of funny what types of monopolies and trusts the government breaks up, well whichever one they need to so they can keep constituents. Other than that, they are quite happy keeping those who lobby around so they can fill their greedy pockets.

jmillsintacoma

You say: “What businesses do when input costs go up is raise the prices of whatever they are selling, be it a capital or consumer good.”

OK, look, business sets prices for its products in such a way as to maximize the revenue based on the demand curve for its product existing in the community.

They are not waiting for costs to rise before raising their prices. They are already maximizing revenue, and if they could increase revenue by raising prices, they don’t wait around for costs to rise before doing so.

Prices for a product are not a function of their costs. Prices are a function of supply and demand.

If a business owner pays a worker $5 to produce something, and if (after all other costs of production) the owner can sell this product for $25, he makes $20 of profit. If, for whatever reason (like a rise in minimum wage) he has to pay his worker $7, then he makes only $23 of profit.

If the product could be sold for $27, why in the world would the businessman not be selling it for $27 BEFORE wage costs went up?

dalibertarian

Of course prices are a “function” of supply and demand, not costs. The owner’s preferences are obviously affected by the rising costs and thus the supply curve is affected. I should not have to point this out, it should be something you understand if you know how supply and demand work.

As a real world example, remember last year when hurricane (or was it tropical storm, whatever) sandy hit the northeastern coast? The reduced supply of gasoline to the area (which means increasing cost to buy gas in bulk at gas stations) was correlated with a huge shortage because price ceilings on the price of gasoline for retail sale prevented the gas stations from raising their prices, in response to rising costs. Clearly, the owners wanted to raise prices in response to rising costs, otherwise there would have been no shortage.

“If the product could be sold for $27, why in the world would the businessman not be selling it for $27 BEFORE wage costs went up?”

First off, it could have been sold for $27 before, but the market would not have cleared because at that price level the business would have supplied more products than consumers wanted at it. If the costs went up, they would now supply less at the price level of $27 and the market would clear again.

In pure model terms since you are so obsessed with them:
The rising costs cause the supply curve to shift to the left, raising the “equilibrium” or clearing price.

“I should not have to point this out, it should be something you understand if you know how supply and demand work.”

Seriously. This is why I keep telling him that while he keeps repeating that he understands that wages are a price, and that prices are determined by supply and demand, he in fact does not, since every premise of his arguments that minimum wages don’t cause unemployment is based on a rejection of the law of supply and demand.

dalibertarian

You learn these basic things even in the economics class your high school provides you with (obviously they don’t talk about the whole minimum wage thing but anyone who thinks critically and applies the logic can figure it out for themselves).

It’s kind of sad that he is able to misinterpret the way the concept (supply and demand) applies to everything that has been discussed.

I know. Like that last ridiculous comment of his. If a baker raises the price of his bread after a severe drought that devastates the wheat harvest, according to his logic, the baker could have just charged that higher price in the first place, even before the drought. As though the clearing price wouldn’t have changed as a consequence of the drought and increased cost of wheat to the baker. He keeps saying he understands the fairly simple concept of supply and demand, but then keeps proving over and over and over again that it is completely beyond his comprehension.

dalibertarian

Even in the real world part of the “helpful” side of the minimum wage occurs. The more productive employees at the same wage get to keep their jobs so long as management doesn’t change their payroll budget, though likely only for a limited time until they realize that the project is no longer profitable. But of course unemployment still goes up immediately as a result so those unemployed workers are in a much worse off situation than they were before.

I don’t know why he keeps trying to press his points through. Even if everything he said were true, the minimum wage is still ineffective even from a purely economic, not just ethical, point of view, because it leaves the least productive people unemployed. Like all other intervention it doesn’t solve the original problem but makes it worse.

Furthermore, I think the fact that shocks occur due to natural factors, and they hurt people (like your drought example) should be one more reason to think about artificial “shocks” like price floors. The price of capital goods(inputs) in the economy do not go up for a HELPFUL reason, they go up for an HURTFUL one in the first place.

I don’t think he has realized that when the other costs of production went up, those were also a necessarily bad thing (and likely caused by some other form of government intervention which could be stopped not some non-economic factor like a natural disaster that we cannot predict).

In a free market, where growth occurs we should expect price decline over time, not price rise. We see price rise due to all the forms of government intervention (mostly monetary supply expansion), not because the economy is growing. I think that is the fundamental fallacy of mainstream economics, very related to their preference of increasing consumption rather than saving.

You would enjoy this video:

jmillsintacoma

If costs just get passed along, then why would increasing minimum wage ever result in unemployment? According to your analysis, the additional costs just “shifts the supply curve to the left, raising the ‘equilibrium’ or clearing price.” Everyone stays employed at the new “equilibrium” price and prices of products merely go up, right?

dalibertarian

A price floor does not change the clearing price for anything first off.

I think Andy did a good job of pointing out why it will lead to more unemployment. If the employer does not change his payroll budget, then unemployment will result.

Of course the employers could respond by simply raising the prices of whatever they are selling. It requires the employer to change his mind about what his employees are worth to pay more for them, just like he must be willing to raise his prices if costs go up. Please if you learn anything, it’s that a real human market actor has to change his mind about something for the prices to be affected. The government cannot simply step in and save the day with its magic without side effects occurring.

jmillsintacoma

OK, but why does it require that the employer be “changing his mind” about what employees are worth?

Let’s say an employer thinks an employee is worth $15 bucks an hour, but the employee is willing to do the work for $5 an hour. This could happen because, as we seem to be agreeing, there is no “objective” value for work, it’s all subjective. Therefore, the employee’s value might be much different from the employer’s value, right? The employee might be willing to work for $5 an hour, even if the employer values the work at $15 an hour, right?

Now, if the employer has figured out that someone worth (to the employer) $15 an hour, is willing to work for $5 an hour, that’s all the employer will pay, right?

That’s so, even if the employer might, from the outset, be willing to pay $15 an hour if the worker insisted on $15 an hour. It’s just that, because the employee isn’t demanding more than $5 an hour, that $5 an hour is all the employer has to pay to get the work.

Now, if a minimum wage goes into effect requiring the employer to pay $10 an hour, why won’t the employer just pay that? And, do so without changing his position that the worker is worth $15 an hour.

Indeed, after the minimum wage changes to $10 an hour, the employee might say: “Hey, I’m going to Tahiti unless you pay me $12 an hour.” And, then we’d expect the employer to pay the $12 an hour, right?

And, all the while, the employer hasn’t changed his mind on whit about the fact that the employee is worth $15 an hour, right?

In this example, a worker initially being paid $5 an hour, by virtue of minimum wage gets $10 an hour, but then later, by private negotiation gets $12 an hour, and the employee never gets fired, right? And, the employer never changes his mind about the fact that the employee is worth $15 an hour, right?

jmills, you simply do not understand understand that wages are a price determined by supply and demand. We have tried and tried to explain it to you, but you remain with fundamental misunderstanding about how this works. To address the specific problem you’re having here with it, the subjective valuations of the parties is self-evidently a factor in the clearing price as determined by supply and demand, i.e., a worker might value $5 more than an hour of free time, and an employer might value that worker’s labor more than he values the $5. No worker in his right mind would accept $5 when they know they can get $15 at the going wage. The fact that you even ask these silly questions just illustrates how you fundamentally fail to understand how prices are determined by supply and demand. You keep saying you do, but you absolutely do not. You have proven that over and over and over.

jmillsintacoma

If the worker will work for $5 and the owner will pay $15, we would expect a trade; but whether that occurs at $5 or at $15 (or at any number in between) depends on a huge array of factors not necessarily even within the control of the two players negotiating.

It’s true that the worker would not work for $5 when he knew the owner would pay $15, but he might not know that.

The owner would never pay $15 an hour if he knew he could get the work at $5 an hour, but it’s not like the worker blurts that out (unless he’s pretty desperate for a job).

A lot depends on other opportunities. If the worker knew the owner would pay $15 an hour, he would not accept $5 unless his neighbor is standing there offering to work for $5. And, in that circumstance, the owner kind of has the upper hand, right?

But, a worker willing to work for $5 at factory A (because there are friendly people there) isn’t likely to cut that deal if he knows that the owner will pay $15 and that there is factory B down the road whose owner is willing to pay $15.

“Supply and demand” is a way of describing the forces that drive prices. It is useful in showing why, for example, prices aren’t a function of costs or of utility, or any of the other things people once thought drove prices. But, where the classical model is flawed is in drawing neat lines that intersect in “equilibrium” and so-called “clearing prices” and such. In the real world there are no such neat lines based on real data, there is – in the real world – uncertainty, a lack of complete information (for example, workers don’t always know what owners will pay and owners never really know what workers will accept). In the real world, there is never “equilibrium” or a “clearing price.” Indeed, this is much of what von Mises discusses at length in “Human Action.” (And, in fairness to classical economist, they typically talked about “tend” toward, not “arrive at.”)

It is in these areas of uncertainty, that lie opportunities for minimum wage laws to operate without causing unemployment.

I agree that wages are driven by supply and demand, and I acknowledge that all prices, including wages, “tend” toward equilibrium. However, none of that implies that negotiating knowledge is perfect, that equilibrium is ever attained, or that “supply and demand” ever intersect at a precise point. Once you recognize that, then any discussion of minimum wage becomes far, far more complex than the classical economists acknowledge.

Jmills, I don’t know why you reject the law of supply and demand, as though it was something that existed in a fantasy and not the real world. You keep saying you agree that wages are determined by supply and demand, but then you explicitly reject the idea that there is such thing as a clearing price based on supply and demand. And you are completely oblivious to your own self-contradictions. How can prices tend towards a clearing price, for example, if no such thing as a clearing price exists? Your self-contradictions effectively render your comment nonsense, and I can’t really respond to nonsense except to point out that it is nonsense.

jmillsintacoma

Hmmm. You are not responding to a real-world example. And, if your analysis is sound, it should at least withstand some real-world numbers.

Can we conceive of a worker willing to work for $5 an hour? He needs some money for food. He prefers $5 an hour to his leisure time alternative of playing foosball or watching NCAA re-runs at the local pub, and so he’s asking around and telling his friends: “Hey, I’m willing to build widgets at $5 an hour, and I’m pretty good at it. Anyone know of a job out there?”

Can we agree that’s possible in the real world?

Now, can we also conceive of a guy who’s factory sells widgets at a price that’s pretty good, and who is willing to pay people $15 an hour to work? Let’s imagine that he’s even been talking at the country club about looking for workers, and telling his golf buddies: “Hey, I’m kind of short on workers. And, I’m willing to pay $15 an hour if you know someone competent to build widgets.”

Is it possible to imagine those two scenarios playing out in the real world?

Now, if we can imagine those two events happening, Let’s envision what happens when the worker strolls into the factory looking for a job.

The first thing that’s apparent is that there is no “supply curve” intersecting with a “demand curve” that arrives at an “equilibrium” wage. Instead, in this real-world example, the final wage agreed upon could be $5, or $6, $7 or $8; it could go all the way to $15 an hour, right?

It won’t be above $15 because the owner won’t pay more than $15. It won’t be lower than $5, because the worker won’t work for less than that. But, anywhere in between is a plausible wage rate that might result from the negotiation of the players, right? It might be $14.99 and it might also be $5.01 an hour, right?

Now, let’s imagine, if you can, that the prospective worker says something like: “I’m pretty good at building widgets, and even got paid $10 an hour at my last job.”

Also, let’s imagine, if you can, that the employer sensing the air of the negotiation says, “Well, that was at Bill’s factory, and his secretary embezzled a lot of money, so they went out of business, but I’m willing to give you $8 an hour.” To which the prospective worker says: “Done. I’ll see you promptly at 8 AM tomorrow morning when the factory opens.”

Can you imagine that such a thing could happen?

If we can NOT agree that this is possible, then I admit we’re at loggerheads and might as well move on. If, on the other hand, you can agree that this scenario is possible, then I’ll try to move along with my further analysis of what that means in the context of minimum wage.

My own thinking is that EXACTLY this sort of thing plays out millions of times a month all over the US, and it is the essential process by which wages are arrived at all over the US. I also think it’s exactly what is likely and even predicted to happen in a free market.

What do you think?.

If you think this is an impossible, or even implausible scenario, perhaps you will share your thinking on why that’s so.

I’m “not responding to a real-world example” because, as I already explained, you didn’t present me with one.

It is possible for a worker to want to work for $5. It is possible for an employer to want to pay $15. It is even possible for a worker to agree to work for $5 despite the employer being willing to pay $15. But this idea you have that it is generally the case that workers throughout the economy do so is patently ridiculous.

What you are effectively saying is that wages are somehow suppressed considerably below the market’s clearing price. Once again, this just illustrates your fundamental failure to understand how prices are determined by supply and demand.

Think it through, jMills, please. Either the $15 is above or below the clearing price. Let’s say it’s below, and thus that there are other employers willing to pay even more. Well, with all these employers out there willing to pay even more than $15 dollars precisely in order to bid away workers from their competition, then, by definition, it cannot be true that workers are generally accepting only $5.

Okay, so let’s say the $15 this particular employer is willing to pay is above the clearing price, and that none of his competition is willing to pay so much. Do you think he is willing to pay significantly more than his competitors simply out of charity? Hey, that’s possible. In which case, he would pay the $15 even if the worker was willing to accept $5. But, then, a business run this way is probably not going to stay in business for very long. Or is he rather willing to pay so much precisely because competition is fierce and he wants to bid away the most skilled workers from his competitors? Assuming this is the case, are you suggesting for your example that his competitors are all paying $5 or less? Why would this business owner, if he is not trying to run his business as a charity but to make a profit, be willing to pay three times as much as his competitors for labor? Does this really seem realistic to you, particular for this to be generally true throughout the entire economy? Really? REALLY?

Seriously, man, think about it, just for half a moment. It is not that difficult to understand why your thinking is just totally unrealistic, or how it is that you just totally, fundamentally, misunderstand how supply and demand works.

You never answered me this, either, so I’m repasting: If you are having trouble understanding this, just think again on the reductio ad absurdum we presented to you earlier: if raising the minimum wage to $9, the number you give, was good for the economy, why not $10? And if $10, why not $15? Hell, Jmills, why not just go ahead and make the minimum wage $50 an hour. Then everyone would make lots of money and be happy. Screw it, let’s just make it $1,000 so we can be sure every worker can afford nice mansions and yachts.

Surely you must see the fallacy of your thinking here. It is glaring.

jmillsintacoma

First of all, in the example I have posited, the math shows that if the minimum wage goes from $6 to $8, then the worker continues to be employed, but simply at a higher wage.

If, on the other hand, the minimum wage goes from $6 to $16, then the worker becomes unemployed. That’s the reason I would never propose an increase to $50 or to $1,000 even though I think a move to $8 or $9 might defensible.

Second, this whole back and forth is not really for us, it’s for the readers of your column. If you think that “patently ridiculous,” “nonsense,” “simply wrong” and the like, are good arguments or explanations, that’s fine. Readers may or may not agree. As you contemplate future columns, I will suggest that this sort of “argument” is not conducive to generating a lively back-and-forth commentary. Just a thought.

Third, I have applied for many, many jobs and talked to many, many people about their job application process. I have never myself, nor have I ever had any of my co-workers discuss how the rate of pay offered, or proposed, compares to the “clearing price” or “market wage.” So, while those concepts have interesting academic uses, in the real world of business, it’s a notion that never comes up.

Moreover, my father ran a business very successfully for decades, and I am self-employed. I also know many business owners. Never have I heard anyone discuss whether or not the wages we offer are above or below the “market clearing price.” I don’t know of anyone who is even aware of a “market clearing price.”

And, in addition, I don’t know any businessmen whose primary (or even secondary, or tertiary) concern is “bidding away workers from competitors.” Again, that has academic value as a thinking tool, but has very little real world application.

Fourth, what motivates a businesses decision about the maximum it will pay is the difference between what it receives in revenue for its product, and all other costs of production. Product prices are independent of costs (for example, what people will pay for an iphone has zero to do with the costs of iphone production). That means business revenue is fundamentally unconnected with costs, including wages.

What motivates a worker to get a job is totally independent of business revenue. It has to do with the worker’s evaluation of leisure time and its relative pleasure compared to the burden of going to work for the benefit of pay.

Therefore, the wage a worker will accept has virtually nothing to do with the amount an employer is willing to pay, and for that reason, these two numbers are not necessarily driven to coincide.

Indeed, just looking around, one notices that many businesses, for example, Apple, Inc., can be hugely profitable for very long periods of time. This means that what owners are paying workers in wages, diverges significantly from what they are getting for their product, and this goes on for decades.

That doesn’t bother me, because I understand that profit is what motivates participants in a free market to direct productive resources to their most valuable uses. Profit is therefore key to the workings of the free market.

However, while having no issue with business making a profit, I simply recognize that whenever there IS a large profit, forcing business to pay a larger wage (as minimum wage laws do) will very likely result simply in a reduction of profit, rather than increased unemployment. A business owner forced by law to accept a lower profit will – so long as there is reasonable profit – keep operating, and keep employing his staff, despite the increased costs, rather than start to fire workers. (That’s true if, say, sales taxes rise also.)

That profitable businesses will opt to receive less profit, rather than fire its staff, is very likely going to be true if the minimum wage moves up wages slightly, but becomes false if the law forces wages up by large amounts. It is this realization that answers the question you ask about “why not just move the minimum wage to $1,000 an hour?”

In academia, workers and employers all have perfect knowledge. The workers know, or quickly discover, what employers will pay and employers know, or quickly discover what workers will accept in wages. Workers are perfectly mobile, and all have infinitely transferable job skills. In academia, supply is a neatly sloping line, as is demand. Both intersect at a defined spot (never a real number, but instead always an algebraic place holder like “Wc” vs. “Wm” or some such thing). All this is true in academia, but not in business.

(And, by the way, in high school Econ.101, all these assumptions are explained, and a disclosure is given about the fact that such assumptions might not prevail in actuality.)

You talk about a business willing to “pay the $15 even if the worker was willing to accept $5,” and conclude: “But, then, a business run this way is probably not going to stay in business for very long.”

That’s something I just can’t fathom. As I look around the world, that is precisely the kind of business that attracts very competent people, does very well, and earns a handsome profit for its owners. What you have described is the most successful kind of business out there . . . in the real world.

Jmills, if you wish to believe that it is a fantasy that wage prices are determined by the law of supply and demand, that this doesn’t occur in the real world, there’s really not much more for me to say.

jmillsintacoma

What’s odd to me is that you believe that the very notion of supply and demand implies what our Econ 101 professors called “perfect price competition” as it’s logical companion. You seem to believe that, because supply and demand are accepted principles of economics, that perfect price competition occurs in the real world. Every economics professor I encountered would draw up those graphs with supply and demand curves, and carefully explain the caveats – the assumptions built in, one of which is that the graphs describe what happens if perfect price competition controls eoconomic decisions and outcomes. See e.g. http://funqa.com/economics/4168-1-Economics.html

Supply and demand AFFECT prices (including wages). That does not mean supply and demand define prices with zero other factors involved, or that – in the real world – actual supply ever meets actual demand at a precise point called “equilibrium.”

I have been suggesting that minimum wage laws have different consequences if we are not at equilibrium than they have if we ASSUME that wages are at equilibrium. That seems important since there is no proof, nor really any evidence at all, that we are at equilibrium here in the real world..

Jmills, everything I’ve said has been based on the understanding that wages are a price, and that prices are determined by supply and demand, such that wages will tend towards the market’s clearing price in a free market. That should have already been eminently clear to you, since I’ve repeated it explicitly numerous times, but repeating something ad nauseum to you isn’t enough for it to sink through. Maybe this repetition will do the trick. If so, now that you understand this, go back and reread what I’ve already said.

dalibertarian *didn’t say* that costs “get passed along” to consumers. He *tried*, futilely, to explain to you that the price of a given product is determined by the supply of it and the demand of the consumers. If you interfere in the market in some way to affect the supply, such as by raising the cost to the producer to bring that product to the market, this does not affect the consumer demand for the good, per se. The cost isn’t “passed along” to the consumer, because having to raise the price away from that price which brought the maximum returns hurts the producer no matter what, whether it is increased or decreased. Just as many people would want to buy the good at the original price, but raising the price means reduced demand because fewer people are willing to pay that higher price. As dalibertarian *tried* to explain to you, increasing the costs to the producer affects the supply, thus affecting the clearing price. He did not suggest, however, that you could move the price of the good to any point and the profits of the business would remain the same, which is the nonsensical conclusion you seem to have drawn.

Now, apply this to labor. This idea of yours that we could increase the minimum wage and everyone would stay employed because producers could just “pass along” the price to consumers is wrong, for the obvious reason that raising prices would reduce the demand for his goods at those higher prices, which would mean the business owner would suffer losses.

Business owners aren’t in business to suffer losses. They aren’t charities. Thus, they will attempt to keep their prices at the same lower level by whatever means possible, such as by laying off his least productive workers whose productivity is valued below the minimum wage. After all, keeping on a worker who the owner is forced to pay more than they are worth means the business is suffering a loss. And if the clearing price of the labor of every employee the business has is below the minimum mandated by law, then that business might end up having to increase its prices to stay in business, despite its best efforts not to have to do that. If there remains enough demand for his goods and competition isn’t fierce, he might manage to stay in business, but will be less profitable. Then the business owner will be unable to use those profits he *didn’t* make but *otherwise would have, absent the minimum wage*, to expand his business and hire *additional* workers. Or he goes out of business. Thus, the result of the minimum wage, one way or another, is unemployment.

What I said is that it is a self-evident logical truism that outlawing jobs creates unemployment. It is difficult to see how one could argue with that. Logic must apply.

You try to split hairs by saying it’s not outlawing jobs, but rates of pay. Same difference. To outlaw the paying of wages below a certain minimum is to outlaw any jobs the labor for which is valued by supply and demand below that minimum.

And you have not basis to say we do not witness the effect of minimum wage laws on employment. If you want to present a logical argument for why eliminating the minimum wage would not help mitigate unemployment right now, you are welcome to present it.

You are right about one thing: minimum wage laws do effectively outlaw competition, thus hindering the market’s ability to employ everyone seeking work by outlawing any jobs for which the clearing price of wages would fall below the minimum. I fail to see how that is an argument in your favor, or in favor of the minimum wage.

jmillsintacoma

You don’t see how mine is an argument in favor of raising the minimum wage because you aren’t employed at minimum wage and about to get a big raise. If that happens, and if you don’t get fired (which happens to the vast majority of minimum wage workers) then you are clearly benefited.

I recognize that it’s a benefit that comes at the expense of the employer. But, it is nonetheless a clear and present benefit to a minimum wage worker.

In your post, you quote Hazlett as saying “[Minimum wage laws] do harm all around, with no comparable compensation.” And yet, for all those (and there are certainly very many) whose wage goes up without any loss of jobs, there is a “comparable compensation” – a real benefit to be had.

Raising the minimum wage harms some and helps some. It is still fair game to ask whether the state should be helping one group at the expense of others, but that’s a wholly different argument from Hazlett’s.

If the US bans importation of beer from Canada, that clearly benefits Sam Adams Boston Brewing. It’s bad for consumers who have to pay higher prices for beer. Similarly, a rise in minimum wage is bad for business owners who have to pay higher prices for labor. But, if anyone asserts that a ban on Canadian beer creates ONLY harm and that there is no benefit, well, that’s not an honest argument and it does not make a compelling case because the Sam Adams owners are going to just chuckle and shake their heads.

So, what opponents of the minimum wage need to wrestle with is why we should not raise the minimum wage even though that might directly benefit many workers. I don’t think that’s an impossible argument, but its not a challenge Hazlett has taken on.

What I said at the outset is that a raise in the minimum wage might result, not in firings and increased unemployment, but simply in owners paying more for labor and being stuck with lower profits. That’s exactly what happens in the case of every minimum wage employee who gets the raise and isn’t fired – there are millions of such employees.

I think any complete critique of minimum wage laws has to at least recognize that this happens.

Again, it is not a benefit to the worker if his job is outlawed and he is thus laid off. Again, businesses do not operate as charities. I’ve already addressed all of this, repeatedly, and so I defer to my previous comments.

jmillsintacoma

We certainly agree on that. It’s not a benefit if the worker is laid off. It’s only a benefit if the worker is not laid off. Some might be; many are not.

Right. Only those whose productivity isn’t valued at or above the minimum wage are laid off. Obviously, those whose wages the market determined to be priced above the minimum wage would not lose their jobs. We’ve been over this endlessly.

jmillsintacoma

Don’t your two sentences above have important differences?

First you say “only those whose PRODUCTIVITY isn’t valued at or above the minimum wage are laid off.”

Next you say: “those whose WAGES the market determined to be priced above the minimum wage would not lose their job.”

I don’t think “wages” and “productivity” are interchangeable.

Because, as we seem to agree, all business has to run on a profit, a person will be employed only if, after paying wages and all other costs of production, there is something more left for the business owner. I think that means virtually everyone that’s employed has productivity exceeding their wages. If they did not, the business would pay out 1) all other costs of production, 2) worker’s wages, and then 3) there would be zero left for the owner.

For some very profitable businesses, worker productivity is very much higher than wages; for businesses with smaller profitability, the differential is smaller.

That worker productivity exceeds wages would be true for business employing people at the minimum wage as well as for businesses who pay more than minimum wage.

As long as an increase in minimum wage is not so large as to squeeze ALL profit out of a business, the employer will just pay out the increase, being forced to accept a smaller profit.

For all we know, as to everyone working at minimum wage, the employer will retain them if there is just a small increase in the minimum wage; the employer simply accepting a smaller profit

This may explain why, when minimum wages increase, there is no historical record of noticeably higher unemployment.

For all those employed at today’s minimum wage, but whose productivity exceeds the new minimum wage, there is a very real and significant benefit when the minimum wage rises. They get a real increase in pay and no layoff.

That increase in pay comes at the expense of the employer who is forced to accept a smaller profit.

I just think we cannot critique minimum wage laws without fairly acknowledging this real benefit to some (typically millions) of workers.

One can still certainly argue about whether that benefit, to many workers, outweighs the harm to those who can’t find employment due to minimum wage.

Just so, when your neighbor is not allowed to compete for your job by offering to do it for less, one can argue about whether the harm to your neighbor outweighs the benefit to you.

But to assert there is ONLY harm and NO benefit is, I think, to ignore a big part of the puzzle.

I don’t know how it is possible for you not to understand that a worker’s productivity has an effect on what kind of wage he receives. Apart from this being just common sense and self-evident, we’ve been over and over and over it. I don’t have time to go through and point out all the fallacies you make here, but I don’t need to, as I have already done so, again and again and again. You can go back and read my previous comments on these same arguments you make. I already explained your errors to you.

jmillsintacoma

I’m going to agree that a worker’s productivity usually “has an effect” on his or her wages.

What I’m hoping you can agree to is that a worker’s productivity is not EQUAL to his or her wages.

If we can agree that workers virtually always produce more than costs of production plus their own wage, and if we can agree that this net surplus is called “profit,” which goes to the owner, and if we can agree that this is as true for minimum wage workers as for other workers, then logic tells us there is the prospect of a rise in minimum wage that does not cause unemployment, but rather results only in a reduction of owner’s profit, right?

How very sensible of you to “agree” with the self-evident truth that a worker’s productivity is a factor considered by employers in the amount of compensation they receive for their labor.

Unfortunately, you still fail to see that that, yes, this productivity is valued by employers according to supply and demand such that it tends towards the clearing price. To say this productivity is not the same as the wage is nonsense. The value of this productivity as determined by supply and demand is BY DEFINITION equal to the wage the worker receives.

As for your question, the answer is “no”. That is NOT right. We’ve been over and over and over this. It is wrong for all of the reasons I have repeatedly been telling you. I won’t repeat myself again on all the errors you make here. You may refer to my previous comments.

jmillsintacoma

I think I understand the problem:

Your analysis is basically the classical economic analysis, but it is wildly inconsistent with the “Austrian School” thinking on economics such as is detailed in Ludwig von Mises’ epic “Human Action.”

In the classical analysis, price equals value and so if you buy a TV for $300, it’s said the TV is worth $300. Classical economists would even say, as you do, that this is true “by definition.” The oddity of this analysis is that trades are apparently going on continuously and no one is getting ahead; people are trading and trading, back and forth, but just trading back and forth things of equivalent value.

In the Austrian analysis, people don’t engage in trade to stay even. According to von Mises (and by my thinking) a trade is made because both sides place DIFFERENT values on the SAME items.

So, according my thinking (mirroring that of von Mises) the TV trade occurs because the guy with cash assigns a value to the TV of MORE than the $300 in hand. He would rather have the TV than the $300. Simultaneously, the guy selling assigns a value to his TV of LESS that the $300 of cash he is about to receive. They trade and both are advantaged. By “Austrian school” thinking, people are trading things constantly and everyone is getting ahead, not staying even. Both sides “trade up.”

The so-called “Austrian school” would say that there is no objective value to the TV, and that all we can discern from the TV trade is that one side assigns a value to the TV of MORE than $300 and the other side values the TV at LESS than $300. We discern those RELATIVE values from the fact that a trade occurs.

The classical model is full of intersecting lines and neat equations that determine values and prices. The Austrian school asserts that values are not objective, but subjective, and that values can’t be measured or compared, or even determined, “objectively.” There are no values that arise “by definition.”

I suspect that this is the cause of our disagreement.

I think you believe that if a person is employed at $5 an hour, the value of his output (net of other production costs) is $5, and you would assert it’s $5 “by definition.”

By my “Austrian school” thinking, all we can say about a person employed at $5 an hour is that the worker assigns a burden to working of something less than $5 an hour – meaning that he prefers $5 cash, to an hour of leisure time. At the same time, the employer values the work at some amount more than $5 an hour. When the worker is employed, both are advantaged. The worker is getting more than he thinks his labor is worth and the employer is paying less than he thinks the labor is worth. What we see is two people who assign DIFFERENT values to an hour of the worker’s time; one valuing it at less than $5 and one valuing it at more than $5.

I can see why – if you think prices equal values – that we have an intractable disagreement. I recommend “Human Action” for your reading. It may not change your thinking on any of this, but it’s a good read.

No, you don’t understand the problem. Nothing I’ve said is contrary to the idea of subjective value, that two people engage in trade because they each place a higher value on the thing the other one has. How you arrived at the conclusion that anything I’ve said even remotely contradicts this is beyond me. In fact, on the contrary, every single argument I’ve made to try to make you understand your constant errors implicitly depends upon understanding subjective value, not to mention marginal utility.

So to repeat, no, you don’t understand the problem. The problem is not my understanding of economics, but yours.

jmillsintacoma

Hmmm. You say your position is consistent with the notion of subjective value.

And, yet, you’ve said this: “Only those whose productivity isn’t valued at or above the minimum wage are laid off.”

Productivity as valued by whom? The employer? The employee? And if the values are subjective, not objective, then how is the value of productivity compared to the minimum wage so as to determine which is higher for purposes of your sentence?

You’ve also said: “The whole purpose of a minimum wage law is to force employers to grant to those whose productivity is NOT valued at such a wage this price for their labor.”

Productivity as valued by the market pricing system, as determined by supply and demand, of course. We’ve been over this ad nauseum. Are you are being deliberately obtuse?

jmillsintacoma

Yeah. I’m trying to understand the “market” value number.

Even, say, limiting us to a small place like New York City, what exactly is the “clearing price” for labor where the supply curve intersects neatly with the demand curve at “equilibrium”? What exactly is the “market price” for labor in New York City, and if we can’t define it to the penny, then how do we know whether it’s higher or lower than the minimum wage in New York?

If values are subjective, and if there is no objective value for an hour of labor, and if the employee’s value placed on an hour of labor is different from the employer’s value, then how exactly do we find the “market” value of productivity from pricing?

In the real world, don’t we just have millions of negotiated wage prices – all essentially different? And, in every one of those negotiations, isn’t it likely that the employee assigns a value to his labor that is less than the wage he’s being paid, and simultaneously, the employer assigns a value that exceeds the wage he’s paying?

It is that differential in valuations that leads to the trade. Both employee and employer are getting more than they are trading away, right?

I think this is one area where the “classical” model’s graphs don’t directly relate to what happens in the real world.

2) I also don’t know how to explain the market pricing system any clearer than has already been explained to you repeatedly. I suggest going back through the comments from the beginning and rereading it with a mind to understand what I and others have been trying to explain.

3) Yes, there is no one single clearing price for all labor. Obviously. It goes without saying that the going wage differs for different jobs, for example. 4) Whether this is “likely” or not is irrelevant.

5) In terms of their respective subjective valuations, yes.

To your concluding statement:

It does directly reflect what happens in the real world. To deny this is to deny the law of supply and demand. It’s called a “law” for a reason. Like gravity.

jmillsintacoma

You say: “Yes, there is no one single clearing price for all labor.”

The federal minimum wage is $7.25 an hour.

By your analysis, if the “clearing price for labor” set by the market is above minimum wage, then minimum wage laws will have no affect on unemployment. It’s only when minimum wage is pegged above the “clearing price” that it causes unemployment.

So, as we consider your analysis, and particularly, say, a raise to $9 an hour for minimum wage, how can we tell if that increase is likely to cause more unemployment? To what do we compare $9 an hour?

In short, as we consider raising the minimum wage to $9 an hour, how do we know whether that’s moving minimum wage above “the clearing price”?

Very interesting discussion, and I’ll go re-read all this and consider it over the next few weeks.

As to laws, any scientific position can be labeled a “law.” Newton’s “Law of Universal Gravitation” states that every point mass in the universe attracts every other point mass in the universe with a force that is directly proportional to the product of their mass and inversely proportional to the square of the distance between them. Einstein’s general relativity explains that Newton’s “law,” while a close approximation of how gravity works, is just inaccurate.

Jmills, I don’t know how to make it more clear to you than I already have: it is self-evident that the consequence of outlawing jobs is unemployment. And the higher the minimum wage, the more jobs you outlaw. Ergo…

If you are having trouble understanding this, just think again on the reductio ad absurdum we presented to you earlier: if raising the minimum wage to $9, the number you give, was good for the economy, why not $10? And if $10, why not $15? Hell, Jmills, why not just go ahead and make the minimum wage $50 an hour. Then everyone would make lots of money and be happy. Screw it, let’s just make it $1,000 so we can be sure every worker can afford nice mansions and yachts.

You just repeated once again the fallacious statement that an employee’s wage is “determined by supply and demand, not productivity”. I already addressed that fallacy. Once again, a worker with a higher productive capability will tend to earn a higher wage, and it goes without saying that the productive capability of the individual laborer is a factor, on the side of the supply of labor.

You then apply this fallacy with the statement, “An experienced, well-proven, respected employee may simply have to take a pay cut because others are willing to work for less.” Sure, if the others willing to work for less are capable of the same level of productivity, which would indicate that the clearing price for wages in this job were trending downward, or if the first worker was overqualified for the job in the first place, in which case he could just go apply for another job and probably get even more pay anyways.

It would be superfluous to continue addressing your further application of the above fallacy. Let’s just skip to where you say, “The free market does not bid up worker’s rates to their productivity, which is to say, the free market does not tend to eliminate all profit.” Once again, this statement just denies that wages are determined by supply and demand for labor. You are just repeating the same fallacy I already addressed with this false assertion that wages are instead determined by whatever net profit the business owner makes minus whatever the owner chooses arbitrarily to pocket for himself. So I defer the rest to my previous comment (and the one before that, and the one before that, and the one before that, etc., ad nauseum).

jmillsintacoma

You say: “Once again, a worker with a higher productive capability will tend to earn a higher wage.”

If you carefully walk through the example I set out earlier below, you will see that the workers with the higher productive capacity – the older group that can make 10 widgets an hour – doesn’t get a job at all. That’s on account of two factors:

First, unless paid $8 an hour, this group PREFERS leisure time – time sailing, motorcycling, or playing with their kids to the $2 an hour being offered by the employer.

$2 an hour is all that the employer will offer because the less skilled workers – the younger group is willing to work for $2 an hour, and this less skilled group, at the wage they demand, generates more profit for the owner.

So, in this example, the less skilled group gets paid $2 an hour, the more skilled worker is unemployed. And, everyone is freely choosing and pursuing their preferred alternative.

If, in the face of the math, you choose to believe that people with greater productivity will necessarily tend to get paid more in a free market than those with lesser productivity, that’s fine. I’d say that the totality of the postings present both sides well and readers can now judge for themselves which analysis they think most accurate.

If you are aware of any standard economics text that supports your assertion that wages are a function of productivity and that more productive people tend to get paid more, I would like to go peruse it just to educate myself. Maybe you can post the title.

I think history shows, and most people are aware of the fact, that often very educated, very productive people choose to be unemployed and live off savings at times when much less productive people choose to have jobs at low wages.

I think most people also are aware of the fact that sometimes, very productive people take jobs flipping burgers, and voluntarily accept low-paying jobs, thus getting paid a wage having nothing to do with their productive capacity.

But, again, readers can analyze all the writings here and make their own judgments.

Once again, in the real world, where there is a law of supply and demand, logic applies, and pigs can’t fly, and assuming free market conditions, a worker with a higher productive capability will tend to earn a higher wage, e.g., a worker who can produce only 10 widgets in an hour isn’t likely to receive the same compensation for his labor as his coworker who can produce 100 widgets in an hour.

Why this is beyond your ability to comprehend is beyond my ability to comprehend.

dalibertarian

The problem may be conflating worker productivity (objective) with worker value (subjective). The worker may produce 10 units/hr but they only do that in light of the fact that they have machines, input material, etc to help them. Without those things they would produce 0 units/hr.

The owner values the productivity of the worker expressed with a certain wage. He values more a worker that can produce 20 units/hr than the one that can produce 10 units/hr with the same equipment, resources etc. The wage is therefore related to worker productivity but there are other factors in the production process that affect the productivity of the worker, so the owner does not value the amount of revenue brought in by that worker the same as the wage he will pay that worker.

jmill’s seems to have a rudimentary understanding of this concept but misses the whole point that all these costs, prices, etc are determined by supply and demand.

You are arguing against yourself. None of us is saying that minimum wage laws “ALWAYS hurts all people”. It specifically hurts those whose jobs are outlawed by it. And, again, is is axiomatic, a self-evident logical truism, that a consequence of outlawing the hiring of labor below a certain miminum wage is that anyone whose productivity is not valued at or above that wage is priced right out of the labor market. As dalibertarian has said, I can’t understand what it is about that that you don’t get.

jmillsintacoma

OK, well if you are agreeing that it hurts some but can help some (those whose productivity justifies a higher wage, but who due to supply and demand for labor have agreed to work for very little), well then what are we saying about minimum wage laws? It helps some and hurts some. If you accept that, then what’s the analysis by which you object to implementing or raising minimum wage? It’s kind of impossible to measure the value of help to those helped, and impossible to measure or quantify the harm to those hurt.

If some are helped and others are hurt, it’s possible that the benefits to some outweigh the detriments to others, right? If so, is it good or bad to raise minimum wages . . . and what do you say to those who would be helped?

“It helps some and hurts some. If you accept that, then what’s the analysis by which you object to implementing or raising minimum wage?”

You acknowledge that a minimum wage law “hurts some [people]”, by which you must mean putting them out of a job, but then you ask what is my objection to minimum wage laws? Apart from the fact that I have been repeating my objection over and over and over and over and over and over, such that it should be more than perfectly obvious to you, you just answered your own question.

“If some are helped and others are hurt, it’s possible that the benefits to some outweigh the detriments to others, right?”

No, it isn’t. That is not possible, for reasons I’ve already explained, repeatedly. For one, again, it is axiomatic that government bureaucrats making decisions arbitrarily do not know better than the free market with its pricing system how to efficiently direct scarce resources to productive ends.

Seriously, man, you can keep repeating yourself, and I can keep pointing out all the ways you are wrong, and you can just ignore everything I and others like dalibertarian and Andy Curzon have tried to explain to you, but it’s really starting to become wearying. You can go back and reread all our responses to you to find the answers to your questions. It really is hard to understand what it is that you don’t get, and there are only so many ways in which we can repeat in different words the same explanations of your fallacies. I have to conclude that you are really just not trying very hard to understand what we have been constantly telling you.

I would merely observe that your whole argument initially was that it wasn’t true that minimum wage laws must create unemployment, while you are now acknowledging that it “hurts some”, by which you can only mean by putting them out of a job, and thus you have tacitly acknowledged that your argument was wrong.

dalibertarian

Great post Jeremy! I just wanted to point out one thing that I think is a little off:

“For one, again, it is axiomatic that government bureaucrats making decisions arbitrarily do not know better than the free market with its pricing system how to efficiently direct scarce resources to productive ends.”

This observation isn’t really axiomatic. It would be true a priori but not because it is axiomatic. Rather it would be derived through a series of a priori arguments with the first arguments in the chain using first-principles/axioms as premises (such as how the laws of supply and demand are derived from the law of decreasing marginal utility which is derived from the axiom that humans have an order of preferences and the action axiom). I know this seems really trivial but I’m just trying to be precise about the terms (kind of like how Andy pointed out my misuse of production and productivity).

By “axiomatic” I simply mean “self-evident”, a logical truism. You seem to be drawing a distinction between self-evident premises (axioms) and the conclusions that naturally follow (a priori arguments), but, if we are going to get trivial with language, I don’t agree with this distinction, since a logical corollary that follows naturally and inevitably from certain premises is likewise, pretty much by definition, self-evident, even if it requires a step or two of thinking to come to the realization of the thing. Maybe you’re familiar with some technical usages of these two terms, but I’m just using the standard dictionary usage. Seems to me both “axiomatic” and “a priori” apply, and we may take our pick.

jmillsintacoma

Let’s say you have a worker who produces value of $100 per hour (after all other costs of production), but due to high unemployment in the community has accepted a job at $10 an hour. The employer is making $90 an hour profit. Everyone is happy.

Now, politicians decree that the minimum wage shall be $15 an hour. Are you saying the employer starts firing people rather than simply accepting profit of $85 an hour?

jmillsintacoma

I don’t understand this. Employers don’t pay employees the value of their production. That would be an owner running and running to stay in place and never turning a profit. Employers who pay employees the value of their production or more rapidly go out of business. Profitable business pays its employees less than the value of what they produce. Therein lies the prospect for possibly discovering that they are paying too little.

“The assertion that minimum wage laws “always” cause unemployment assumes that the free market has arrived at the equilibrium point…”

No, it doesn’t assume that. You’re arguing from a false premise.

“If we can’t assume equilibrium exists, then the model cannot tell us if increased unemployment results from forcing wages up.”

Non sequitur. Your conclusion does not follow from the premise. We can know this. It is axiomatic that the consequence outlawing the hiring of labor below a certain price is that workers whose productivity isn’t valued at or above that price will be unable to get a job. This is a self-evident truth.

“if business persistently sets wages below the “equilibrium” or “clearing price,” (something that could happen due to business misjudgment) then forcing wages up increases employment along with wages.”

You keep talking about reality, but this is not reality. You need to explain how it would be possible in a free market for all businesses everywhere in the economy to be offering wages to workers below the clearing price. After all, the lower cost of labor would by definition mean that there was a high demand for it with businesses competing to create jobs and hire employees, thus bidding up the price of wages towards the clearing price, which would be different for different sectors of the economy and different jobs within each of those sectors.

jmillsintacoma

Supply and demand are the movers of labor prices. But as Ludwig von Mises explains in Human Action, there are a variety of things moving prices for all things. Accordingly, an “equilibrium intersection” never occurs and certainly isn’t static. The price of labor for phone workers would be dramatically affected by, say, introduction of the iphone. Or by Skype. It’s affected by inflating the currency, and by government contracts and a whole host of economic factors. It’s virtually impossible to identify a time, place, or business where the supply and demand of labor have neatly intersected at the “equilibrium price” and stay fixed for any period of time. Labor prices are virtually always above or below “equilibrium” and therefore minimum wage laws sometimes benefit workers, sometimes don’t. We should at least be honest about that ambiguity, rather than asserting it necessarily or always causes unemployment.

Yes, price discovery is a constant process. But minimum wage laws always interfere with that process in a way that prices lower wage earners whose productivity isn’t worth that minimum wage right out of the market.

Andy Curzon

(feel like you are repeating the same logic Jeremy?! It is so simple surely…NMW can ONLY do bad in short)

Yes, I am repeating myself a lot. Trying to do so using different words, but having no luck getting through…

jmillsintacoma

I suppose my only argument here is your use of the word “always.” Ford discovered that by doubling the minimum wage at his factory, he made more money. That happened because more dedicated workers, being happier to work, gave him lower turnover, and a higher quality of output. He discovered that only after guessing at it, then trying it.

If the legislature increases the minimum wage, other owners might be forced to discover the same about their own business. It’s not impossible that business has misjudged the appropriate wage, right? It’s not impossible that owners are erroneously paying less than the “clearing price,” right?

If so, then raising the minimum wage probably helps some and hurts others.

When arguments over-reach and oversimplify, they just become weak arguments. There are good objections to politicians meddling in the market, but the classical analysis of minimum wage has obvious enough issues so that it does not present a compelling case. Defenders of the free market should be willing to recognize that if we are going to be taken seriously.

The best response to advocates of increasing the minimum wage is not “That always increases unemployment.” A far better response is: “Why does this politician not recognize that this will harm some people? And, if we count the benefits, to some, but not the harm to others, we will not be fairly evaluating the total impact of the legislation,.”

You’re using the term ‘minimum wage’ here in a completely irrelevant way. Businesses everywhere all the time discover that they are able to do good things for their bottom lines by adjusting wages up or down as necessary. To draw the conclusion that because in some instances, such as in your Ford example, the price moves upward that therefore a law requiring such a minimum wage would do no harm and create no unemployment in other businesses elsewhere in the economy is a rather obvious non sequitur.

jmillsintacoma

Hmm. This seems like we’ve somehow rotated 180 degrees. I have never said minimum wage can do no harm. I’ve said it harms some, and helps others.

I think it was originally asserted in the writing we’re commenting about that minimum wage ALWAYS does harm; that it can do no good.

If we can agree that sometimes businessmen discover they are paying wages that are too low to maximize benefits to all, then why can’t we agree that a law forcing up wages MIGHT do some good for some people in some businesses?

If business owners are wrong, and politicians “get lucky,” then it is possible that a raise in minimum wages forces business to discover what they should have guessed at without the law.

Again, I’m merely pointing out that it’s inaccurate to say that minimum wages ALWAYS cause an increase in unemployment.

The free market has many advantages over other systems of economic organization. Infallibility of business owners is not one of them.

And I never said you said minimum wage can do no harm. I rather observed the fallacy of your above argument that in that particular circumstance, it would do not harm, i.e., wouldn’t cause unemployment. You keep repeating that “it’s inaccurate to say that minimum wages ALWAYS cause an increase in unemployment”, no matter how many times I and others have demonstrated its invalidity. It’s becoming wearying. It is axiomatic that making it illegal to hire people below a certain wage prices lower wage earners right out of the labor market. This is just self-evident. It requires no further proof. It’s a logical truism.

Andy Curzon

We are not in a discussion about whether NMW should be increased but whether it should exist at all.

dalibertarian

Exactly! This is what I’ve been saying in each post to him. He treats the market process as tantamount to guessing but it is a process about moving towards clearing markets. No voluntary actor in a market has it in his interest for there to be a surplus or shortage of products in the market. Everyone wants the prices to become such that the people who want the products get them and businesses don’t have extra. That is why the markets are preferable, because they work to actualize people’s preferences, the entire purpose of an economy in the first place.

The fact that the minimum wage law is effective across the economy makes it even worse as you said. I completely forgot to mention that. Even if it helps in a certain industry or for one type of job, it will almost certainly hurt in many others.

dalibertarian

You’re first paragraph is entirely correct. The market is never at an “equilibrium point.” This is why Austrian economists prefer to call it the “clearing price,” which implies that it is not a point of static equilibrium but is rather dynamic, changing quite often. The market is always moving towards this price though through voluntary transactions and competition. If the price for labor is really below the clearing price then there is a surplus of jobs. If the price for labor is above the clearing price then there is a surplus of labor. Either way leads to unemployment, which in turn leads to less productivity. It is in both the employers’ and employees’ interests to move towards the price that reduces unemployment. Once the market gets close, short of sudden drastic changes in conditions (such as government intervention or natural disaster), it will stay close and thus there will not be shortages or surpluses of products but “clearings” of them.

Prices convey signals to both workers and employers. You can be assured that in time the labor markets will work out any “bad” wages to maximize productivity, employment, and profitability. Our model perfectly accounts for this – given time the market will adjust. No one is saying that the current state in the market (yes even a free market) is 100% ideal. We are claiming it is moving at all times towards being 100% ideal. Being able to determine whether/when it gets there is trivial. I’m pretty sure Hayek showed long ago why the state cannot do it as efficiently.

We agree that it probably won’t happen overnight and we agree that the market doing it is the best alternative so what exactly is the point of continuing argument when we have exactly the same views?

I think part of the problem might be that you are expecting too much from an introductory book to economics. If you read Human Action; Man, Economy, and State; or Road to Serfdom your questions will be answered.

dalibertarian

Jeremy is 100% correct. You have to remember that changing the minimum wage does not change how the business views the value of any of the components of production. If the business responded by decreasing dividend payments it will probably lose shareholders. That drop in demand for their shares will result in a lower market price for their shares and hurt their ability to raise funds in the stock market by selling ownership. They would run into a similar situation if they decided not to pay back loans with getting credit in the future. The business will cut back where the problem is, not where they can cause further problems. Or maybe instead they will raise the price of the product since consumers now have higher wages and leave them in no better of a position than before.

Your McDonalds example is incorrect anyways since it is a franchise company. Most owners own around 6 stores. They will definitely be cutting back in labor.

Individual franchises and small businesses are probably hurt more by minimum wage increases than larger businesses. The larger business has a larger capital base so they do not get hurt as much by the increased costs. This still ignores the fact that the business is necessarily hurt by this in some way and it is going to choose the options that cause the least harm to solve the problem – namely laying off employees and raising prices.

The Henry Ford quote is correct in explaining incentives. But the correlation is typically reversed. An increase in the productivity of employees typically leads to them being paid more. This is why more productive employees have higher wages. What is “right” for the business manager to do is a matter of opinion for business managers to decide. When the government steps in to force wage increase you lose all your ethical and economic justification for the policy.

jmillsintacoma

Whether owners actually pay a dividend, or just keep the net profits for themselves, my point remains: An owner faced with unplanned and increased labor costs, might or might not close the shop. Owners might simply elect to continue running their operation and simply take a reduced profit. In that regard, labor costs are no different than other costs of production. If costs go up, owners often simply accept smaller profits.

So your argument is that Hazlitt didn’t take into consideration that if business owners across the entire economy all just choose to make less profit, then miminum wage laws wouldn’t lead to unemployment? I bet you’re right, Hazlitt probably didn’t consider that, for the obvious reason.

dalibertarian

Maybe owners would choose to do this. The fact remains that most would not. They value the labor they get at a certain amount. If they have have to pay employees more than they think they are worth it is clear that most people would choose to hire less employees.

So what if the employers instead choose to reduce the payment to themselves? Well this means that they have reduced the incentive for themselves to work. If they choose to do this long enough they will probably either end up closing shop because they do not think continued business is worth it or to end up laying off workers. Either way workers still lose their jobs and unemployment goes up. No one will give up their incentive for starting their business in the first place perpetually. I’m sure the business owner with all his experience will not have a problem finding another job elsewhere or starting another business that can purchase labor at the market price.

Aside from the existing entrepreneurs what do you think happens to the people considering starting a business if they cannot find labor at prices they can afford? That’s right they won’t start businesses. Guess who is still unemployed? The same people who don’t have skills that will give them a market value at or above the minimum wage.

You are fighting a battle you cannot win. The fact that market wages are determined by supply and demand guarantees that there will be a shortage of jobs and surplus of labor when wages are held above market price. Even if you’re idea did happen across the entire economy, it could not last for very long and eventually the same effect will happen.

jmillsintacoma

If “market price” is not known, but is always in a state of flux or discovery, then how do we know minimum wage is “above” market price?

dalibertarian

The market price is the one prevailing in the market. The clearing price is where quantity demanded exactly equals quantity supplied (no unsold inventory or lack of inventory to meet demand). The market price moves towards the clearing price. We always know the market price, and given a stable market and time, markets will “clear.”

The market can be seen as the abstract idea of where people exchange and the price can be seen as the indicator that facilitates production to meet consumption.

So we don’t know for a fact that the minimum wage is above CLEARING price, but given the fact that markets perform effectively on their own in moving towards the clearing price, we can safely assume that it will be above it (after all the minimum wage is only implemented because it is above the market price for the lowest paid laborers).

You ask the question as though there was only a single price to consider. Obviously, though, there are many different sectors of the economy and many different types of jobs within each of those sectors, all with their own clearing price. To treat a complex economy with a one-size-fits-all solution like a minimum wage law serves merely to price anyone whose productive value to the business is not at or above that wage right out of a job. This is perfectly self-evident.

Heartland Patriot

And I guess those evil business owners should be “fixed” on how much profit they can keep, eh comrade?

wave Trader

maybe Krugman should have read and studied H.Hazlitt’s book on “How To Think”

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